Stocks had a bad day following Federal Reserve Chairman Ben Bernanke’s press conference on Tuesday where he outlined his worries about growth in the second half and steered clear of discussion of more quantitative easing.
The lack of talk of a third round of quantitative easing or QE3 from the Fed governor diappointed investors and stocks fell. One analyst is predicting more losses to come.
“This disappointment is hardly surprising given the boost to equity prices that the first two rounds have provided,” said John Higgins, the senior market economist at Capital Economics in a note to clients.
“We think QE3 is unlikely to see the light of the day this year, and that equities are likely to struggle even if the economy picks up some steam,” he said.
“With valuations stretched, we continue to expect the S&P500 to fall to 1,200 by end-2011. There can be little doubt that quantitative easing has boosted the stock market,” Higgins added.
With the Fed’s extraordinary measures boosting the risk-on trade, investors have been encouraged into stocks by both QE1 and QE2 and the period between both actions saw losses for stocks and investors and central bankers worrying about deflation.
“It is therefore not inconceivable – although by no means certain, given the struggling economy – that a third round of quantitative easing would inject new life into the stock market,” said Higgins.
“We wouldn’t rule out altogether the possibility of another round of quantitative easing, but we doubt it will materialize until 2012 at the earliest,” he said.