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Jim Bianco via Forbes
Over the past few days, we have been discussing what the impact of QE has been on the economy.
Forbes columnist Bob Lenzer channels Michael Cembalest of J.P. Morgan to dive deeper into that concept and look at what markets have been doing in response to QE, in a column titled You Can Thank Ben Bernanke for 100% of the Stock Market Gains Since 2009:
“Here is the most important factual find about the stock market I’ve learned for some many years: More than 100% of equity market gains since January 2009 have taken place during the weeks the Fed purchased Treasury bonds and mortgages. And conversely, during the weeks when the Fed did NOT buy Treasuries or mortgage backed bonds, the stock market declined.”
I have to respectfully disagree with Lenzner, Cembalest, and my pal Jim Bianco (who has also done yeoman’s work tracking the impacts of various Fed interventions).
Note that I do not lightly challenge this trio — Lenzner is an all around smart guy, Cembalest is Chairman of Market and Investment Strategy fpr JPM, and Bianco (also all around smart guy), who was the first major analyst in early 2009 to fully recognize the future impact of QE, how it was going to impact equities and bonds, the transmission mechanism thereto, and articulate it in a way that was readily understandable by most people.
There are several reasons I disagree with the thesis — in no particular order:
1) Complexity: Single vs. Multiple Variable Analysis in Market Forecasts
2) Market Performance Following Secular Bear Markets (or down 50%+, oversold, etc.)
3) Earnings Rallied as Much as Market Have Off of Lows
4) Timing maybe as coincidental (Correlation Does Not Equal Causation)
There are a variety of reasons why I am unwilling to attribute the 100% suggestion. The first and most obvious is that markets are extremely complex, with all manner of psychological, valuation, trend as well as monetary inputs. The intricacy of equities is such that there is almost never any one single factor that causes major market moves in either directions. Invariably, there are a myriad factors that establish conditions, impact traders, affect how people interact that are the prime causes.
If you are willing to say the Fed is the cause of 100% of market gains, you are simultaneously implying that every other factor had a net zero impact. I simply don’t buy that.
Take for example point 2: Do a basic study on market sbased on many of the conditions that existed in 2009: Markets down 57%, less than 5% of equities over 200 DMA, sentiment metrics, valuation analyses, etc. What you will find is a range of possible market returns that were very positive. For example, the secular bear market cycle showed a median gain of 70% over 17 months, with a range of 41% (Italy 1960s) to 295% (Finland, 1990s). If you want domestic version, note that the US gained 170% in the 1930s. You can run studies on all of the rest of the various potential inputs, and you will find similarly huge subsequent returns.
Again, I am unwilling to dismiss this cyclical history in favor of the Fed exclusively.
Same thing with earnings — they plummeted an enormous amount, only to recover almost 150% from the quarterly lows. I don’t believe we should ignore that either.
Last, we know markets sometimes anticipate new elements, and occasionally lag behind reality. We cannot say for sure that this timing is causative. Markets tend to anticipate major events, swinging from overbought to oversold,. Its hard to imagine that more of a discounting mechanism wasn’t taking place.
You Can Thank Ben Bernanke for 100% of the Stock Market Gains Since 2009
Forbes October 17, 2013
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