A couple of months ago CNBC ran an item with the headline Most Economists Say Fed Easing is Helping. The claim is based on the quarterly survey from the National Association for Business Economics (NABE). They found that 62.4 percent of the economists they polled think the latest round of stimulus, aka QE2 that began last November, was working. Here is an overlay of the S&P 500 (NYSE:SPY) and the major phases of Fed intervention since 2007.
The market peaked at its all-time nominal high in October 2007. But the Fed had begun cutting the Federal Funds Rate FFR a few weeks before. The first of a string of bail-out programs began with the Primary Dealer Credit Facility (PDCF) on March 17, 2008 in response to the collapse of collapse of Bear Stearns. The market rallied for a few months before rolling over. The dramatic cliff-dive in price was triggered by the bankruptcy of Lehman Brothers. The Fed responded by expanding PDCF and further cutting the FFR. The market rallied for about a month after first round of quantitative easing, the purchase of Mortgage-backed securities MBS, was announced, and it ended 2008 off its lows. A zero interest rate policy (ZIRP) has remained in place since December 2008, and the purchase of mortgage backed securities was well underway. But the market renewed its decline at the beginning of 2009 until hitting a bottom on March 9th.
The rally since the March 9th low has been substantial. But with the end of quantitative easing approaching, the market began a correction in April 2010. The summer doldrums promptly ended when Chairman Bernanke hinted of more quantitative easing in his August 27th Jackson Hole speech. The market bought the rumor, and a new rally ensued. When QE2 began, this time with Treasury purchases, the market had a brief “sell the news” reaction. But by December 2010 the rally returned to high gear.
With QE2 coming to an end, the real question, of course, is what happens next. On April 29th, with two months of QE2 remaining, the market hit an interim high of 1363.61, approximately 200 points below its nominal all-time closing high of 1565.15 in March 2009. The maximum correction thus far, one week ago, has been a decline of 7.2%.
Summer officially began yesterday, but it’s a bit early for the classic summer rally. Meanwhile, the debt crisis in Euroland continues, and eventually the U.S. Congress will have to engage more effectively in solving our own debt problem (NYSE:TLT). Gross Federal Debt-to-GDP is at World War II levels.
Indeed the summer months should provide an unusually high level of interest for watchers of the markets and the economy.
Doug Short Phd is the author of dshort.com.