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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
Robert Lenzner
Forbes  October 17, 2013

Category: Bailouts, Federal Reserve, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “How Much is QE Driving Equity Markets? (Hint: Not 100%)”

  1. wild88 says:

    Hey, I brought this up when the new email format debuted, but I am hopeful that the email format can more closely resemble the one it replaced. That is, more of the actual content. Just wanted you to know that that would be of interest. Thanks.

  2. MayorQuimby says:


    The QE could theoretically be the entire *initial* catalyst but with sub-catalysts being additional catalysts themselves (catalyst and sub-catalyst are not mutually exclusive).

    Analogy – are parents responsible for their children’s misbehavior/success? Well – in a sense – they are 100% responsible. But at the same time they aren’t at all/are very much so (gray area).

    Look at it this way – had QE not occurred at all where would we be? To me that is the only calculation that really matters (and whether or not Fed can monetize forever – imo they cannot).

  3. wisegrowth says:

    “Invariably, there are a myriad factors that establish conditions, ” … Agreed. 100% QE impact is not logical. Yet, the low interest rate & QE of the Fed have contributed to an environment favorable to equity investment in the face of a lower real GDP. The supply of money to capital income has increased greatly, while the supply of money to labor has fallen.

  4. Concerned Neighbour says:

    There can be little doubt that markets at the 2009 lows were both cheap on a fundamental basis and heavily oversold. Therefore, you can’t in my view reasonably attribute all market gains during QE 1 to that policy, though it obviously did stabilize an otherwise fragile situation.

    Where I would differ with your assessment is with regards to the subsequent rounds of QE. Let’s take this last *round* (read: seemingly indefinite $85B per month). Does anyone really think the incessant/meticulous/diagonal up multiple expansion we have seen under this policy is really due to improvements in fundamentals? Does anyone really believe stocks were cheap when this open-ended policy iteration began? This is 100% central bank induced bubble formation in my view, or certainly very close to it.

  5. rd says:

    It appears that they haven’t read much of one of the recent Nobel Prize winner’s writings.

    Based on a 2009 low of 13.3 for Shiller’s CAPE (month end number from Doug Short’s Update), simple reversion to the CAPE mean of 16.5 would have pushed the S&P 500 up a couple of hundred points. A small overshoot would have been another 100-200 points.

    I think ZIRP and QE have kept interest rates 1%-2% below equilibrium rates over the past several years. The Fed has also kept windows for banks to get money wide open. I think these moves did three key things for the stock market over the past 5 years:

    1. The CAPE secular bear market bottoms historically have been in the 5 to 9 range. We hit 13 in 2009. Bernanke and the Fed were primary reasons why the stock market didn’t spend the rest of 2009 heading to 400. Will we avoid a sub -10 CAPE? Who knows but Uncle Ben bought us time to find out instead of getting it immediately in 2009.

    2. ZIRP and QE have been able to at least partially offset government austerity, stupid fiscal policy decisions, complete government dysfunction, etc. and avoid a 1930-32 GDP plunge and deflation to date. That has allowed companies to make money and do at least some hiring. It also allowed the housing market to stabilize and stage a mini-recovery. I would have preferred it if more rational decisions were made on the fiscal front with more normal Fed monetary policies, but we go to war with the army we have, not the one we want (Donald Rumsfeld – good quotes, bad policies).

    3. It funneled a bunch of cash into traders hands (e.g. record margin debt) and took away incentives to invest in cash and bonds. I think this has provided the additional fuel to push stock market valuations from a more normal bull market CAPE level of 16-20 up to a pretty high level of 24.

  6. dctodd27 says:

    How much can we attribute to suspension of FAS 157?

  7. mllange says:

    3) Earnings Rallied as Much as Market Have Off of Lows

    Earnings driven in large measure by the other side of QE = ZIRP. Easy to boost earnings (and corporate’cash’) when corporations are issuing bonds at levels never seen with virtually no interest impact on the bottom line. The longer-term question then becomes, what happens ‘earnings’ when interest rates climb or assume some semblance of normalcy?

  8. 4whatitsworth says:

    Most will agree that earnings drive the stock market and 60% of the earnings come from reduced interest expense these days. That leaves the 40% to argue over.

    I know my company which is not very tied to all the craziness and stimulus has been flat while my investments are way up. I would like to think that my investment gains are due to my brilliant decisions but if I were honest with myself it was likely the stimulus.

  9. Capitalist Canuck says:

    3) Earnings Rallied as Much as Market Have Off of Lows

    Would be interesting to overlay the earnings chart with the QE/S&P chart.

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