In his latest evaluation of David Glasner´s inflation expectations stock price correlation, jp of Capital Spectator finds that recently the correlation has ‘disappeared’. His third explanation is:
The third possibility is that the new abnormal is no longer relevant. In this case, higher (lower) inflation expectations no longer align with higher (lower) stock prices and higher (lower) economic growth. In this case, a return to macro normality, which prevailed before the 2008 financial crisis, has regained its throne.
My chart relates 5 year inflation expectations and the S&P 500 index.
And my preferred explanation for the absence of correlation since the end of last year is that inflation expectations have converged to the 2% target and will remain there (at least as long as it is believed the Fed will not allow inflation to ‘travel freely’ above it).
In that case, the more recent support for the stock market likely comes from the more ‘durable’ monetary policy commitment embodied in placing thresholds on the permanence of QE3 (not because we´ve returned to “pre-crisis economic normality”).
Historinhas 