Brickell Analytics’ CEO Isaac Gilinski on the Abnormal Growth Rate of the SPX since 1994

When it comes to the market not all growth is good.

Brickell Analytics’ Isaac Gilinski is warning his clients about another case of excess leverage or easy credit. This time, it involves the balance sheets belonging to three of the world’s largest central banks — namely, the Fed, ECB and BOJ — and their insatiable appetite for lending cheap, easy money.

The normalized annual growth rate of the SPX between 1927 and 1994 was 5%. However, this was before central banks got involved and started expanding their balance sheets. Since then, central banks have participated in the marketplace and the SPX has risen by an abnormal annualized growth rate of 8%. Since 1994, the balance sheet of the Fed has expanded from about $400 billion to around $4 trillion today, and, since 1999, the combined balance sheet of the G3 central banks has gone from a low of $2 trillion to a high of more than $14 trillion today.

If the SPX had continued at a 5% annual growth pace for the last 25 years, or since the 460 level in December 1994, the SPX would reach the approximate 1500 level at the end of 2019, as per the following calculation:

460*(1.05)²⁵ = 1557.72 (fair value of SPX on Dec. 31, 2019)

Instead, the SPX has risen by an annualized rate of 8% since 1994. And hence, according to this metric, a value of 3000 is 100% above the expected fair value of 1500 as per the chart below.

To align itself back to the normal 5% growth rate of its first 67 years, a case of reverting back to the mean, the SPX would have to drop by 50% from the current 3000 level.

Disclaimer from the Author

All views, thoughts, and opinions in this article belong solely to the author and do not necessarily reflect those of Brickell Analytics. Additionally, the prediction made by Brickell Analytics discussed above was one of many predictions made by the company and not all predictions are accurate. Brickell Analytics does not provide any personalized investment advice, nor does it engage in the trading of securities. The content of this article should not be considered investment advice or an offer to sell or the solicitation of an offer to buy any securities. All profits are for demonstrative purposes and are not a suggestion that similar or future profits may occur. Past results are not necessarily indicative of future results. All investments involve risk and potential loss of principal. It should not be assumed that future investors will experience returns comparable to those of the research discussed above.