QE1 and QE2 juiced the stock market; will QE3? It likely will.
I know, traders hate QE (learn more). They think it has juiced the stock market. It has. They think it has created a distortion in the markets. It has.
They think there is a strange disconnect between the S&P 500 at a four-year high and a global economy that is either mired in recession (Europe) or in slow growth (the U.S. and China).
There IS a disconnect.
Get used to it. The Bernanke/Draghi put is real. And it is likely not going away.
My own feeling is that Bernanke is unlikely to unveil a dovish, pro-QE3 speech at Jackson Hole. For traders, this will likely be an excuse to take modest profits going into the long weekend. (Read More: What Markets Really Expect Bernanke to Say)
(Confronting the Crisis: Tune in all day Thursday and Friday to CNBC for coverage on the Fed at Jackson Hole. )
Regardless: even if Bernanke indicates QE3 is not imminent, the threat will hang over markets.
Respected market analyst Ned Davis recently released a report on the effect of QE1 and 2 on the stock and commodity markets, authored by John LaForge and Warren Pies.
QE1 started in November 2008 and concluded in March, 2010. QE2 started in November 2010 (Bernanke announced it at the end of August at Jackson Hole) and concluded in June, 2011.
Here, from the Ned Davis report, is the percentage change in the S&P 500 since QE1 started:
During QE1 up 36.8%
Between QE 1 & 2 down 10.5%
During QE2 up 19.1%
Since QE2 up 11.4%
Get it? QE 1 and QE2 appears to have moved the stock market; when it was withdrawn, the market was either down (between QE1 and QE2) or up much less (since QE2).
This outperformance is even more stark when you examine commodity stocks:
During QE1 up 82.7%
Between QE 1 & 2 down 8.7%
During QE2 up 21.4%
Since QE2 down 9.3%
During QE1 up 48.2%
Between QE 1 & 2 down 14.1%
QE2 up 36.5%
Since QE2 up 14.7%
Big moves up when QE is on, big decline when withdrawn. The exception is energy stocks, which have held up well since QE2 concluded.
Commodities like gold, silver, copper and oil also rose during QE.
Just look at what copper did:
During QE1 up 116.3%
Between QE 1 & 2 down 6.9%
QE2 up 21.8%
Since QE2 down 16%
Oh I know, you are all saying, "The effect of QE is diminishing! It's not going to matter!" That is not at all clear. Even without QE3, most traders agree that the anticipation of it is helping buoy markets.
Why do you think QE3 will look like QE1? Do you think Bernanke is not aware of this, or that he won't do something different...more creative...than he did before?
Do you really want to bet he is out of bullets?
Yes? Fine. Go ahead. The S&P 500 is up nearly 13 percent this year. Are you?
I didn't think so.
—By CNBC’s Bob Pisani
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