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Federal Reserve 'Financed' 17% of all U.S. Stock Purchases

A billion used to be a big number, but ‘billions’ today are outdated like Myspace.

Today we (and with ‘we’ I mean the Federal Reserve) talk in trillions.

The Federal Reserve’s balance sheet is about $3.7 trillion. As recently as July 2008 the Fed’s balance sheet was below $900 billion.

Since then the Fed embarked on a little shopping spree (about $3 trillion worth). As it turns out, when the Fed goes shopping, Wall Street goes shopping.

According to the World Bank, the total market capitalization of the U.S. stock market in 2012 was $18.67 trillion (2013 estimate around $21.4 trillion).

Based on preliminary 2013 figures, the Federal Reserve’s balance sheet could have bought 17% of all U.S. traded stocks.

The chart below provides a visual as it plots the total annual U.S. stock market capitalization against the S&P 500 (^GSPC). According to Standard & Poor’s, there is over $5.14 trillion benchmarked to the S&P 500 index.

View enlarged S&P 500 / stock market cap chart here

We know that the Federal Reserve doesn’t directly buy equities (other central banks do), but it may as well have.

The Federal Reserve is pumping about $85 billion of fresh money (about $110 billion total since maturing funds are reinvested) into the ‘economy.’

‘Economy’ sounds better than big banks and financial institutions (the Fed calls them primary dealers, there are 21 such primary dealers, most of them U.S.-based), but that’s where the money is going.

Big banks on the other hand turn around and buy stocks and ETFs – which may include Financial Select Sector SPDR (XLF), or SPDR S&P Bank ETF (KBE), and of course Twitter, LinkedIn and Facebook (not Myspace).

Aha Moment

We’ve all heard how big the Federal Reserve’s balance sheet is before and have gotten used to (and desensitized) to the number.

View enlarged Federal Reserve / stock market comparison chart here


However, when viewed in comparison to the total market capitalization of all U.S. traded stocks, it becomes obvious just how big a player the Federal Reserve really is.

If you – like me – are fascinated with large numbers, you’ll like this little piece of trivia:

Is it possible to put a price tag on all the assets held in the entire United States of America? Yes it is. In fact, we’ve done this right here (based on Federal Reserve data): How Much is The Entire United States of America Worth?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF


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