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 an easy money stance from global central banks. The U.S Federal Reserve was the first to begin quantitative easing (a.k.a. QE) which takes the easy money stance a step further and allows them to print money to stimulate both Main Street and Wall Street.
Let’s Look At The Facts:
QE 1: The March 2009 low (and this bull market) 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 and the market took off again. In November 2010, QE 2 officially began and the Fed would begin 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%.
QE 3: 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.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 in December 2012, the Fed essentially doubled down and said it would buy a total of $85 billion per month of bonds to help stimulate markets. Stocks surged on the news and never looked back. In addition, the Fed has held interest rates near zero since the 2008 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. Imagine how much worse it would be if global central banks were not pushing hard.
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 goals: help 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 one of the consequences of printing all this money is inflation. Many people are concerned that once inflation does kick in, it will become rampant and uncontrollable. But until then, the fans of QE 4 argue that more stimulus is needed to help Main Street recover from the worst financial shock since the Great Depression and keep Wall Street moving higher. Keep in mind that this is an unprecedented coordinated experiment from global central banks and no one, not even the Central Banks, know the outcome.We are optimistic that everything will work out well but also would be remiss not to mention the risks involved with this unprecedented global experiment.
