U.S. Stocks To Bank Equity Ratio - Now In The 95th Percentile

By Atle Willems of EcPoFi

Tuesday, February 21, 2017 7:18 AM EDT

The ratio between U.S. stocks and the amount of equity for U.S. commercial banks is today in the 95th percentile based on data since 1987 and more than 21% higher than when it peaked in July 2007, just prior to the 2007-2009 bear market.

Source: FRED® Graphs ©Federal Reserve Bank of St. Louis. 2017. All rights reserved. All FRED® Graphs appear courtesy of Federal Reserve Bank of St. Louis. https://fred.stlouisfed.org/, Wilshire Associates

Currently, the ratio is also 39% and 44% higher than the average and median, respectively.

Furthermore, looking at the same data but on a y/y percentage change basis, the increase in the ratio during the past year is in the 97th percentile. This suggests there is a relatively low probability the ratio will move much higher during this cycle and that a reversal is perhaps the more likely scenario at this stage.

Further growth in the amount of bank equity will of course act to support stock market prices at any given ratio. But (especially at stock market peaks and troughs) stock prices can change substantially quicker than bank equity ever can. It's therefore changes in the ratio (which of course is driven by changes in stock market valuations), rather than changes in bank equity, that is the driving force of equity returns over the short- to medium term.

Over the longer term however, it's still increases in the quantity of money - which is reflected in bank balance sheets, including equity - that is the driving force of stock market prices (I describe in detail why here).

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