Stocks Take Off Their Beer Goggles

My friend Peter Boockvar is not a fan of unconventional policies at the Fed to boost the economy. He’s also been a critic of the way QE has artificially boosted the stock market. Here he looks at the recent weakness in the Russell 2000 that everyone’s so concerned about and ties it to the tapering off of the Fed’s bond-buying programs…

As all of us search for reasons why the S&P 500 is at a 3 month low, the Russell 2000 is at a 4 month low, the Mid cap 400 index at a one month low, and the high yield bond etf’s are back to the lows of the year, I’m going to be blunt with my belief. S**t happens when QE ends. Back in January, obviously way early as I always am, I said QE puts beer goggles on investors and makes everything look great and the end of it in 2014 would be trouble. Twice before when QE ended, the goggles cleared up. Let’s look at the evidence of the market and I’ll use the Russell 2000 to start. The Russell 2000 took off in March 2009 after QE1 was expanded (obviously marking the market bottom) and didn’t break its 200 day moving average until May 2010, about two months after QE1 ended. QE2 was then widely telegraphed in Jackson Hole in August ’10 and the Russell 2000 took off and didn’t see its 200 day moving average again until late July 2011, about two months after QE2 ended. Operation twist then followed but it certainly was not the same as QE and it wasn’t until late 2012 that the Russell 2000 took off again of course driven by QE3/4. It then was 6 months into the end of the QE program and the Russell 2000 broke its 200 day moving average.

He makes a similar case when looking at the behavior of both mid-caps and large-caps, but the Russell appears to have been the most sensitive to the beginnings and ends of these programs.

Of course, the other side of this debate is the fact there’s also been more than enough earnings growth during this experiment, even if it hasn’t necessarily manifested itself in a more robust GDP recovery.

Can stocks weather the end of QE4 next month so long as the Fed doesn’t jack its interest rates higher anytime soon?


Peter Boockvar
Managing Director, Chief Market Analyst
The Lindsey Group LLC

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