The Stock Market and the Fed's Quantitative Easing

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The Stock Market and the Fed's Quantitative Easing
EWI president Robert Prechter explains why QE1 failed to stabilize the market

By Vadim Pokhlebkin
Wed, 13 Apr 2011 14:45:00 ET

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Our subscribers and free Club EWI members sometimes ask us questions about the U.S. Federal Reserve bank "supporting the stock market."

It's not a surprising question. Many people on financial TV, in the blogosphere, and in other media assume that the Fed is doing exactly that -- and winning.

But here at EWI we are all about "visual aids," namely charts. Think back to the recent past (2008), and take a look at this excerpt from Bob Prechter's January 2011 Elliott Wave Theorist:

...In my view, the Fed has made a huge tactical mistake in launching QE2, because it could ruin the Fed’s mystique.

Figure 11 shows the unprecedented expansion of the Fed’s balance sheet in the second half of 2008.

[Figure 12 shows] that the policy had no effect on the stock market or commodities, which crashed throughout the term of the Fed’s QE1 buying program.

... The Fed did not cause markets to do anything; crashing markets pushed the Fed to react.

When the markets turned up naturally (our [February-March 2009] call for a stock market bottom was based on market analysis, not the Fed), people convinced themselves that Fed policy had finally made the markets reverse course: “After all, it takes time for new money to work its way through the banking system….” And, as Elliott Wave Theorist predicted in 2009, the Fed has accepted credit for rescuing the economy.

Thanks to the markets’ natural rebound [off the March 2009 low] and the ensuing economic improvement, the Wizard has fooled the Dorothys.

The Fed has fought -- and lost -- the first round of deflation brought on by a severe downturn in social mood in 2007-2009. These charts blow some pretty big holes in the old adage, "Don't fight the Fed," don't they?

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Tags: Ben Bernanke, fundamental analysis, Greenspan, Robert Prechter, quantitative easing, S&P 500, stock indexes, U.S. Federal Reserve (the Fed)

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