Ten trading days after the announcement of a third round of Quantitative Easing, traders are still trying to figure out the tape. Though a pullback was certainly expected after horrible durable goods data on Thursday, stocks rallied instead.
Adam Parker, Morgan Stanley's chief U.S. equities strategist says investors need to wake up to reality. "Data has been softer for several weeks now," he says in the attached video. "People have been ignoring it." ISM, Retail Sales and Trade Balance figures have all been grim and Parker doesn't think there's anything Bernanke & Co. can do about it.
Saying QE amounts to the Fed "creating money on a computer to buy their own securities" Parker finds it hard to fathom what difference that would make to the corporations who do the hiring. As he sees it, nobody's going to be doing any hiring until there's some clarity on fiscal policy. That won't come until January, if then.
The weakness here and apparent worsening condition of Europe has Parker thinking the Fed is going to go even bigger than buying $40 billion worth of mortgage backed securities per month. When asked if this equates to QE4, Parker said, "we suspect they'll do more. What they've announced so far just appears to small to us to offset the weaker economic data."
While he'd greatly prefer the Fed do nothing, that's obviously not going to happen. What most people fear is that the Fed will create inflation through all this money printing. In reality that's exactly what Bernanke is trying to do. Inflation is bad, but deflation is what scares economists when they lie in bed late at night.
What's an investor to do? Play small and defensive. The earnings are small and inorganic. To Parker that makes multiple compression inevitable. At the moment the S&P500 trades around 14x forward earnings. Parker says 12x makes more sense in this environment. That's a difference of 14%, suggesting about 1,242 on the S&P500.
- Quantitative Easing
- Morgan Stanley