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Wednesday, August 17, 2011

Quantitative Easing and the Stock Market(s)

In comments here, Art asked:

Hi, Jazz... I have the impression that when Quantitative Easing created pressures, the economy let off steam by sending asset values (and stock values) up. Did you ever look at correlations between QE and the Dow?

I admitted that I had not.  A little googling revealed that Bill McBride at Calculated Risk has done exactly that.  Here is his graph, and here is the source post.   The post also contains this Robert Shiller quote from July, 2010.

"For me a double-dip is another recession before we've healed from this recession ... The probability of that kind of double-dip is more than 50 percent. I actually expect it." (via Reuters: Chance of Double-Dip US Recession is High: Shiller)

Which is a bit of an aside.  Be sure to have a look at the CR graph!

It seems to present a compelling case that QE 1 and 2 had significant effects on the U.S. stock market - very much to Art's point.  And it sort of makes sense, in a way.  Both QE's injected money into the economy . . . well -- not quite.  More correctly, both QE's injected money into the FINANCIAL SECTOR.  And wouldn't it make sense for some of that to end up in the Big Ponzi?  I mean, it didn't end up in job creation or the pockets of the middle class - let alone the working poor.

But, as I will show below, if you believe that the QE brothers cause movement in the U.S. stock markets, then you might as well believe they also cause movements in markets around the world.   I've labeled the points on the chart the same as CR did.  Blue line is SP500, Green line is DAX (Germany), Brown line is Nikkei 225.  The end of QE 1 squelched markets here and in Europe, and absolutely devastated it in Japan.

UpdateArt correctly reminds me that the end of QE 2 in July should be indicated on the chart.  Just put a mental mark at the right end of the graph, where all the indexes nose dive in unison.

Correlation is not causation.  In fact, the correlation is not really as compelling as I suggested up above.  QE 2 did comparatively little in this scenario.  The stock market moves to its own rhythms, and world wide markets are, in general, highly correlated.

Say what you will for or against QE.  It's effects on the Stock market are imaginary.


The Arthurian said...

Hey thanks, Jazz! So you... googled it, huh? Why didn't I think of that??

Anyhow, you need another arrow maybe at the end of June for end-of-QE2, just before the big July drop in the markets...

Also I was trying to rough up the comparative size of QE1 ($1.25T) and QE2 ($900B)... If those numbers are right, #2 was about 3/4 the size of #1. Maybe that is the reason "QE 2 did comparatively little" to the markets.

I don't understand your last three paragraphs and that graph. I see Nikkei went off in its own direction...

Anyway, thanks again.

Jazzbumpa said...

Art -

During the QE1 period, the three indexes are essentially lock step. If QE is the cause, it is the common cause. Did our QE affect stock markets in Germany and Japan? I find that very hard to take seriously.

you need another arrow maybe at the end of June for end-of-QE2, just before the big July drop in the markets...

Right, but fixing it would be such a pain in the ass . . .

The Nikkei fell harder and stayed down longer when QE 1 ended. It's movements are directionally the same as the SP, but the magnitude of the moves are different. So if U.S. QE is the driver, it drove harder on the other side of the world than it did at home.