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How Central Bank Policy Impacts Asset Prices Part 1: Equities

Tyler Durden's picture


Fed 'credibility' has boosted stocks from the start of its actions; the ECB, however, only since OMT. But as SocGen's cross-asset class research group notes, poor performance of the S&P 500 since QE3 announcement (-1.6%) may
well be an initial sign of a loss of impact from the Fed’s policy, and US equity volatility is rising - catching up to Europe's.

Via SocGen:

S&P 500 and QEs: third time lucky?

During the two phases of QE carried out by the Fed, US stocks appreciated by around 48% at their peaks, on an annualised basis. The rally during Operation Twist was milder, but still strong at +36% (annualised). As a result, the S&P 500 gained about 15% (ann.) in the past four years as the Fed resorted to unconventional policy tools. Security purchases of past QEs have contributed to lowering rates, which is bullish for risky assets like equities. The upcoming purchases of QE3 aim to push stocks even higher. But, as current equity margins are at historical high and in light of the global economic slowdown, can US stock prices continue to climb at the same pace going forward? The poor performance of the S&P 500 since QE3 announcement (-1.6%) may well be an initial sign of a loss of impact from the Fed’s policy.

ECB: increased credibility but politics prevail

Mr Draghi took over as head of the ECB just one year ago, and already the perception of the ECB’s monetary policy has changed radically. The new president has adopted a more “Fed-like” policy: first with the launch of 3-year LTROs in December 2011 to support bank liquidity; and, more recently, with the OMT, the unlimited bond buying programme to support sovereigns. Following Mr Draghi’s pledge to do “whatever it takes” to save the euro and the subsequent announcement of the OMT, the Euro Stoxx 50 rebounded (+15% in 10 weeks).


The ECB has removed some equity tail risk by providing European governments with more time to find solutions to the euro crisis. However, as Spain still has to request bailout help, the implementation of ECB measures remains constrained by political decisions.



Source: SocGen


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Mon, 10/29/2012 - 11:27 | 2927921 Bansters-in-my-...
Bansters-in-my- feces's picture

"credibility".....? Make me fucking puke.

Mon, 10/29/2012 - 11:31 | 2927931 bigdumbnugly
bigdumbnugly's picture

the first two words of the first paragraph makes one immediately read with skepticism but the article seemed to bounce back fairly nicely from there.

Mon, 10/29/2012 - 11:41 | 2927961 JustObserving
JustObserving's picture

Ultimately, the Fed will start buying US equities directly and openly.  They will employ hundreds of Kevin Henrys.  

Bank of Japan is already doing it with its stock market and Israel is already investing its reserves in US equities.

US ponzi markets are backed by the infinite printing power of the Bernank.

Mon, 10/29/2012 - 11:42 | 2927965 Zer0head
Mon, 10/29/2012 - 12:09 | 2927988 odatruf
odatruf's picture

What is missing is the why. Why does QEx lead to higher stock prices?

First, disabuse yourself of the idea that average stock owners / buyers gain confidence that the Fed won't let the economy go down the shitter. It is not retail (meaning real humans using their own money) who are doing anything. In fact, those people moved to the sidelines long ago. Instead, most volume is made up of professional traders executing institutional / fund orders or algo (robot) price fetching and front running.

Second, understand that when the Fed directly lowers rates, such as it does at the window or indirectly by bidding up bond prices to drop yield, that the intention is not to help people reduce their current interest expenses, but rather the single goal is to force investors to buy something other then bonds in search of gains that will preserve capital in real (inflation adjusted) terms. So what can they buy that retains enough liquidity and can swallow the flow volume? There is really only one answer: stocks.

Once you understand those two concepts, then ask yourself why the Fed would seek to do this.  I'll post my thoughts to this question later today.

Mon, 10/29/2012 - 12:11 | 2928055 yogibear
yogibear's picture

Look at Zimbabwe's stock market. Enough said. It shot up after hyperinflation.

Mon, 10/29/2012 - 12:45 | 2928177 MiltonFriedmans...
MiltonFriedmansNightmare's picture

Why would the Fed do this?

There always, I repeat always, has to be a bagholder. Joe 6pack is the likely candidate.

Tue, 10/30/2012 - 00:20 | 2930445 Excursionist
Excursionist's picture

I've actually been trying to figure out the mechanics of the "why" for the better part of this year and haven't been very successful.  The crux of my incomprehension is how, say, $40B printed in a given month, via the purchase of MBS, translates into SPX support or outright rally.  It's not just rotation from fixed income to dividend-paying equities.  And it's not just a Pavlovian front running response to QEx expectations.  The $40B can end up with commercial banks, but then what?  How does some portion of the $40B end up invested in equities?

Mon, 10/29/2012 - 12:01 | 2928029 tooriskytoinvest
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Economist Michael Pento Warns of Inevitable Financial Collapse: “The Real ‘Fiscal Cliff’ Is The Coming Currency And Bond Market Collapse.”

Troika wants 150 changes in Greece - now!

Obama Suggests ‘Secretary of Business’ in a Second Term (Fascism Alert!)

Bond markets to remain closed Tuesday

Mon, 10/29/2012 - 12:08 | 2928046 Vince Clortho
Vince Clortho's picture

The Fed is buying life insurance for the Central Banker ponzi.  

Maintaining high stock prices reinforces the perception that there is still life in this economy.  If the stock "market" is allowed to drop like a stone (which it would if the Fed stopped the massive purchasing program), it would be game over for the kleptocrats that have been stealing the wealth of sovereign states like the U.S.

So they will continue to PRINT counterfeit money and buy stocks as long as they possibly can.  It's worked for a long time and the Central Bankers are comfortable in their assessment that the muppets are too stupid to figure out what it going on.

Mon, 10/29/2012 - 12:12 | 2928060 odatruf
odatruf's picture

Why do we always come here,
I guess we'll never know,
It's like a kind of torture,
To have to watch the show...

Mon, 10/29/2012 - 13:44 | 2928351 madcows
madcows's picture

It's called self preservation.

If the FED allowed the process to play itself out, the banks would go bankrupt and the government would go bankrupt.  Resulting in the FED going bankrupt.  Their only alternative is to extend and pretend, with the hope that they will get paid back.

It is also important for their representatives to get reelected, b/c they are part of the scam, too.  It behooves the FED to keep the economy's appearances up, b/c it gets the pols reelected... and they are in the FEDs pockets.  New pols with non-friendly FED agendas will  hurt the FED.  it's all a big con game, and they need to con to keep going.

Mon, 10/29/2012 - 13:00 | 2928230 kevinearick
kevinearick's picture

City Planning

So, empires are predicated upon supra-linear, viral, growth, which is an opposing force to the basic biological equilibrium pathway at the macro level. Did you notice all the extra males and then all the extra females in the data? There is nothing new about empire development; hiding the Pavlov swap depends upon cognitive dissonance in both directions. Successive populations are addicted to the past, and get their financial necks broken on reversion.
Empires run on auto, relative to themselves, in the background, robots replicating robots, creating artificial stability, while loading the tail risks. You must interrupt the empire to regulate it. A small initial adjustment has a much bigger effect than a large subsequent adjustment. That’s the nature of time, the butterfly effect.
Relative to the stimulus, Bernanke is tightening, relative to demographics. Re-think famine. Relative to nutrition, Americans are pickling themselves with manufactured food. Between their food, healthcare, education, jobs, and automobiles, all a function of bureaucracy, they may as well be on feeding tubes. The Fed, credit, is the zombie re-animator.
That’s it, bankrupt the airlines and hollow out the military to float Boeing, and drive up gas to $4 for a couple of jobs in North Dakota. Does General Dynamics ring a bell? The US no longer makes anything anyone else wants to buy, short of a gun to their head. Ask the USSR; service jobs, consumption and government motors do not an economy make.
There is no such thing as a top-down economy. There is only efficient top-down extraction. Lizards are lizards are lizards, and they have been at their game for quite some time, long enough to maximize extraction down to the last gas station in the last town. Look at the data. The cities are coming out from a cookie cutter, and a bunch of brats clamoring for equal rights to different colored tennis shoes from the same factory in Asia is not liberty, except to the materialistic tweakers inhabiting these cities.
Existing regimes have been simulating empire growth with monetary expansion, bridges to nowhere, to mollify their populations, because they passed the demographic tipping point to convexity a long time ago. Lots of people have to die to reboot the existing program, or a new program, a new ‘religion,’ must replace the old. How do we live together, in space?
Adjust privacy. Top-down systems don’t work because global stability depends upon local instability, relative to global stability. It’s like balancing a portfolio, to create a buffer. Order and disorder are perceptions, depending on the side of the looking glass. When the sanctity of marriage at its core is violated, liquidation occurs, with time-delay perception based upon empire potential. Physical diversity is a poor substitute for spiritual diversity.
You can be consistent, authentic, and have your own style, while appearing random to empire participants. Look at pi. The trick of course is not to give away your starting point, or more practically, do not place others in a position to do so. Empire peer pressure simply exceeds their capability.
Note that additional planets, increased the certainty of Newtonian physics, and linearity is the exception in the universe, not the rule, except in small domains. Essentially, you are applying torque to the empire, employing its gravity as leverage. It does you the favor of creating the juxtaposition.

Mon, 10/29/2012 - 14:02 | 2928406 edifice
edifice's picture

The law of diminishing returns is clearly expressed in the first chart. Soon they'll be buying $100+ billion a month in "assets," just to keep the DJIA afloat at 13,500.
