CNBC tells us Most Economists Say Fed Easing is Helping. The headline claim is based on a 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, is working. Here’s 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 a few weeks before. The first of a string of bail-out programs began with the Primary Dealer Credit Facility 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 was announced, and it ended 2008 off its lows. A zero interest rate policy 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.
The real question, of course, is what happens next. The Fed has certainly pumped the market. But valuation fundamentals don’t support this price level. Also, Gross Federal Debt-to-GDP is at World War II levels.
The NABE survey generally gives good marks to the Fed’s intervention. But not all signs are positive. Treasury yields are higher than when QE2 began, as are mortgage rates (presumably not the Fed’s intention). And the turmoil in North Africa and the Middle East poses a new threat to the economy. As I type this, NYMEX April crude is trading above 106.
This year March Madness may extend well beyond the basketball court.
Doug Short Ph.d is the author of dshort.com.