Morgan Stanley chief U.S. equity strategist has a big report assessing the impact of QE on the stock market today.
In a note to clients this morning entitled QE3 – More Is Required, Parker argues that "QE3 will likely be insufficient to significantly boost equity markets and we wouldn’t be at all surprised to see the Fed dramatically augment this program (i.e., QE4) before year-end, particularly if economic and corporate news continue to deteriorate as they have over the past few weeks."
Parker goes on to explain his reasoning:
At this rate of MBS purchase – and based on prior programs – we see only a weekly 25bp expected return for S&P 500 from QE3. While such a return can accumulate over months, it is dwarfed by weekly S&P historical volatility (2.3% since 1980 and 3.0% since November 2008) – and can easily be swamped by macro, earnings and geopolitical events. This is the main reason we suspect more QE3 (which we will call QE4) will be announced by year-end assuming the EPS trajectory pans out as we suspect.
Aside from forming the basis for Parker's QE4 call, the study arrives at seven main conclusions:
- For every $10 billion in additional purchases of mortgage-backed securities by the Fed, the S&P 500 was boosted by about 0.25 percent the following week.
- The stock market did better in weeks when the Fed bought more assets.
- The stock market did better when the Fed purchased MBS than when the Fed purchased Treasuries.
- The following week's stock market returns were not significantly correlated with the previous week's purchases, suggesting that the effect of QE purchases on stocks is pretty short-lived.
- Furthermore, while the effect of QE purchass on stocks is statistically significant, it's not that statistically significant – for the statistically literate, Parker says that "T-stats are only in the 2's."
- There are diminishing returns to asset purchases under quantitative easing programs.
- QE usually benefits growth stocks and junk stocks the most, with healthcare the top sector and discretionary and telecom stocks as relative underperformers.
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