Easy Money From Global Central Banks Continues To Fuel This Market
Since the historic March 2009 low, the benchmark S&P 500 has surged a very impressive 203% making it one of the strongest bull markets in history! The primary driver of this entire 5.5 year bull market has been easy money from global central banks which is also known as quantitative easing (or QE between friends).
Let’s Look At The Facts…
QE 1:
Don’t take my word for it, let’s just look at the facts. The March 2009 low began shortly after QE 1 was announced. After QE 1 ended in early 2010, the S&P 500 fell -17% very quickly.
QE 2:
Then in the summer of 2010, the Fed hinted that QE 2 would be announced shortly and the market took off again. In November 2010, QE 2 officially began and the Fed began buying $600 billion of Treasury securities by the end of the second quarter of 2011. When QE 2 ended the S&P 500 quickly fell 22%. Then, you guess it, the Fed stepped up and announced another round of QE 3 at the end of 2012 which sparked the latest leg of this very strong bull market.
QE 3:
A third round of quantitative easing, “QE3”, was announced in September 2012. In an 11–1 vote, the Federal Reserve decided to launch a new round of QE and buy $40 billion per month of agency mortgage-backed securities. The market barely budged on the news, then a few months later the Fed essentially doubled down and said it would buy a total of $85 billion per month of bonds to help stimulate markets. In addition, they Fed has held interest rates near zero since 2009 financial crisis.
Other Central Banks Are Printing As Well
The Fed is not the only one on the dance floor. Nearly every major central bank in the world has adopted an “easy money” stance and is working hard to stimulate their economy. What amazes me is that even with all this stimulus the global economy remains anemic at best.
The Fed Has Two Jobs: Dual Mandate
It is important to note that the Federal Reserve is in charge of monetary policy.
When the U.S. Congress amended the Federal Reserve Act in 1977, it essentially gave the Fed a dual mandate: to promote maximum sustainable employment and price stability. Price stability is usually interpreted as low and stable inflation. Put simply they have two tasks: create jobs and keep inflation low.
The Case For QE 4:
At this point, the jobs market is slowly starting to improve but deflation remains more of a threat than inflation. Also, investors know that the global economy remains anemic at best and the last two times QE ended, stocks fell hard. So a very strong case is being made for QE4. Remember, that a direct consequence of printing all this money is inflation and the fear is that once inflation does kick in, it will become rampant and uncontrollable. This is an unprecedented global coordinated experiment from global central banks and no one, not even the Fed, knows the outcome.
