U.S. equities have had a banner year, but a Wall Street legend says something just doesn't feel right.
Byron Wien, vice chairman at Blackstone and a 50-year veteran of Wall Street, pointed out Wednesday there has been a "strong congruence" between the Federal Reserve's balance sheet expansion and the S&P 500's rise since 2009. However, the benchmark U.S. stock index has spiked 10 percent higher this year while the balance sheet has remained flat.
The chart below from Wien's post shows the correlation between the balance sheet and the S&P, as well as the divergence taking place this year:
"This divergence is disturbing, particularly since the Fed is contemplating a balance sheet shrinkage starting in September," Wien, 83, said in a blog post Wednesday.
The Fed said Wednesday it expects to start reducing its massive $4.5 trillion balance sheet "relatively soon" if the economy behaves as expected. The central bank amassed its gargantuan portfolio following the financial crisis in its effort to jumpstart the U.S. economy.
Some investors, including now apparently Wien, believe the expansion in the Fed's balance sheet since the financial crisis artificially inflated asset prices and now that the central bank is looking to take the air out of the balloon, equity prices will eventually follow.
Wien, whose annual list of 10 market surprises is required reading on the Street, said the Fed's tightening of monetary policy and the "small increases in productivity" will be an obstacle for the market to overcome in the second half of the year.
Yet he doesn't expect this process to derail the bull market this year. Wien said he believes the S&P will continue hitting record highs before Christmas as corporate earnings remain strong. Second-quarter earnings have picked up where first-quarter results left off, with most S&P 500 companies posting strong results.