The markets were in bloodbath mode today. Alot of pain out there obviously. With that said, it’s interesting to look at last Summer’s sell-off as a test run of this Summer’s. Here’s an interesting take on the exact relationship between the timing of QE2, the market sell-off and the eerily similar timing to the sell-off following QE1. From Stephen Lewis of Monument Securities:
Still, there are strong grounds for arguing that the latest slide in US equities reflects, more than any other factor, the termination of the Fed’s QE2 Treasuries purchases on 30 June. The equity market is behaving much as it did following the end of the QE1 asset purchasing programme in March 2010. Then, equity prices went on rising through much of April 2010 before peaking on 26 April, seventeen trading sessions after the end of QE. This time, the market’s advance extended to 21 July, fourteen trading sessions from the end of the Fed’s asset-buying. It presumably takes a little time for the recipients of Fed liquidity to commit those funds to the capital markets, hence the short lag between the end of QE and the market peak. Some observers might contend that, on both occasions, market confidence in the economy turned down and this was the primary factor undermining equity prices.
However, disentangling causes from effects is far from straightforward. It may be that the weakening in market confidence reflected the fact that the Fed was no longer injecting liquidity. Supporting this view is the observation that, in the latest episode, the equity market kept on rising even after the June non-farm payrolls report had provided objective evidence of weak economic activity. If investors were really responding to views on the economy, equities would surely have turned down when the payrolls figures were released and not waited for a further two weeks to begin their decline. The Fed’s argument has been that it is the stock, not the flow, of QE that matters most. The past month’s experience points in the opposite direction. Dr Bernanke is probably beginning to realise that he has a junkie under treatment.
This makes sense. The similarities are amazing and explain why everyone is looking to Bernanke to save the day again. The only thing I would add is their are some other interesting factors that I think added to the market heading south so quickly this past week. As readers of this site know, we really felt the rally following the announcement of a Greek bailout about a month ago was a classic short squeeze. After that short squeeze rally the market sold off a little while our politicians fumbled around with a possible default on U.S. debt, but it didn’t sell off as much as one would think as simultaneously to the situation in D.C. everyone was seeing an obvious deterioration in U.S. economic data and the Greek bailout that cause the squeeze was no longer looking so hot. The sell-off probably should have started earlier, but market participants were likely spooked by that Greek bailout short squeeze fresh in their memories and didn’t want to get caught up in another one related to a U.S. debt deal finally getting announced. One that almost all market participants were banking on happening. As soon as the shenanigans in D.C. were brought to a close, and their wasn’t a relief rally, everyone shifted their focus to bad economic data and the continuing shitshow in the Eurozone, and everyone saw their chance to dump stocks.