QE3 Not Enough to Help Equities. QE4 Might Be Approaching

on Sep 25, 2012

Although the US Federal Reserve has just announced its latest monetary easing move, QE3, as the market euphoria started to fade, analysts in turn started calling for a QE4. On 24 September 2012, Barron’s magazine reported that the global financial services company Morgan Stanley (NYSE:MS) was expecting the Fed to “dramatically augment” its stimulus programme before the year’s end.

On September 13, the Fed announced that it was going to purchase more mortgage-backed securities until the US unemployment rate reached acceptable levels. And while stock markets expectedly surged following the news of an open-ended third round of quantitative easing, Morgan Stanley notes that the near-term feedback from equity markets could prove disappointing. CNBC news quotes Adam Parker, chief equity strategist at the New York-based securities company, as saying that the Fed will soon find its new programme to be inadequate. “QE3 will likely be insufficient to significantly boost equity markets and we wouldn’t be at all surprised to see the Fed dramatically augment this program (i.e., QE4) before year-end.”

!m[](/uploads/story/457/thumbs/pic1_inline.png)As noted in the Barron’s article, one of the reasons why the new stimulus programme might prove to be insufficient is that while it is open-ended, it is in fact much smaller than the previous two rounds of quantitative easing. Mr Parker notes that based on previous QE effects, the S&P 500 may be expected to gain 15-25 basis points per week, as a result of the new round of QE. The projected increase, however, will not be enough to offset the average weekly market volatility of 2.3 percent. “QE3-related gains could cumulate to 3-4 percent return by year-end, but we see headwinds — negative earnings revisions, especially for 2013, and reappearance of tail risks — that could dominate and more than offset these potential gains,” comments Mr Parker.

CNBC news notes that Morgan Stanley is not alone in warning about the potentially insufficient effects of the new QE round. The macro economic research consultancy Capital Economics notes that there are too many factors such as the Eurozone debt crisis and the stand-off in the US fiscal cliff negotiations for the Fed’s monetary easing alone to have the desired effect.

Morgan Stanley recommends that investors favour stocks which have underperformed or “growth stocks”, as well as lower-quality equities. CNBC news on the other hand reports that Bob Janjuah, fixed income strategist at Nomura Securities advises traders to watch 1,450 on the S&P 500 as a critical level. According to Mr Janjuah, the impact of the Fed’s QE3 will wear off and the index will plunge to the 800 level. On September 25, Bloomberg reported that the S&P 500 fell for a third day or its longest decline in seven weeks, dropping by 0.2 percent to 1,456.89 at 4 p.m. New York time. Six out of 10 groups in the S&P 500 went down, with technology and commodity shares demonstrating the biggest losses. Nevertheless, the index is still up 16 percent in 2012.

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