ALREADY?! Morgan Stanley sees QE4 by the end of 2012
The title of a new report from Adam Parker says it all – “QE3 – More Is Required.”
Morgan Stanley's chief U.S. equity strategist issued the report to his clients this morning. Parker argued:
"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, particularly if economic and corporate news continue to deteriorate as they have over the past few weeks."
His reasoning is sound, if not somewhat disturbing considering the amount of debt the Fed will foolishly commit to:
“At this rate of [mortgage-backed securities] purchases, and based on prior programs, we see only a weekly 25bp [.25%] expected return for S&P 500 from QE3. While such a return can accumulate over months, it is dwarfed by weekly S&P historical volatility (2.3% since 1980 and 3.0% since November 2008) – and can easily be swamped by macro, earnings and geopolitical events. This is the main reason we suspect more QE3 (which we will call QE4) will be announced by year-end assuming the [earnings per share] trajectory pans out as we suspect.”
Two of the report conclusions are important to consider on their own regarding the need for more action from the Fed, if it is going to try to boost the economy.
The first is that every $10 billion in mortgage-backed securities purchased by the Fed boosted the S&P 500 by about 0.25% the following week. The second is that the following week's stock market returns did not correlate with the Fed's purchases.
In other words, any boost to the S&P 500 from QE3 will be incredibly tiny, amazingly short and disappears into normal market volatility.
Two more Federal Open Market Committee meetings are scheduled for this year. If the Fed is going to do more, we'll hear about it after the October 23-24 meeting or the December 11-12 meeting.+16
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