Through The Jackson Hole Again?
Two years ago, in August of 2010, Ben Bernanke pre-announced QE2 at the annual Jackson Hole economic policy symposium. What followed was a 20% spike in the stock market as the impact of another liquidity deluge was digested by the market, leading to such luminaries as Tepper to make his first ever TV appearance telling everyone he was "balls to the wall" long. The QE effect came and went, and Tepper made money, and then lost it, as QE2 was followed by Twist, and then by more easing out of Europe, including a global coordinated intervention. This year, as the US and global economies have been floundering, the Fed has so far disappointed, and despite a "mere" continuation of Twist, has so far refused to implement the same bazooka measure that it did 2 years ago, no doubt well aware that doing so would merely confirm that every successive intervention has less of an impact, and last about half as long as each previous one (as we demonstrated over the weekend). The market, however, like the honey badger, does not care: and with stocks trading just shy of 2012 highs, and with Crude having soared by 20% since July, and with Brent at 3 month highs, is very much convinced that the imminent Jackson Hole symposium of 2012 will be a repeat of 2010, and Bernanke will announce something (and if not, there is always September, and if the disappoints then there is October, and December - in a world addicted to Fed liquidity the only thing that matters is when is the next fix). So what happened in the last run up to the 2010 Jackson Hole meeting? Here is a visual and factual summary.
The nearby table shows the market trends in the second half of 2010. After the Fed’s Jackson Hole meeting, the markets moved in divergent directions. The turn in the equity market was particularly notable. Stocks rose 16.6% from Jackson Hole to the day after the announcement of QE2 on November 3 (see chart). Many analysts point to the chart as proof of the powerful impact of QE. The dollar was also weak and commodity prices rose. Ironically, the market most directly impacted by the buying program was effectively flat over this period: 10-year Treasury yields rose slightly, as implied inflation expectations rose more than real yields fell.
Decomposing the 16.6% stock price gain into six parts, we find:
- Over this period “no news was good news,” in the sense that the market rose a cumulative 3% on days without major events.
- US macro data boosted the market by a cumulative 4%. The data was much better than expected and recession fears faded.
- Corporate news on net boosted prices by 1 ½%; better news from Europe added ½ pp and other macro news added 3 pp.
- Finally, there were three days where Bloomberg identified the Fed as a significant driver of the markets. The cumulative rise in stocks on these days was about 5%.
What is unsaid: the end result of QE2 was merely a delay of the inevitable, with the economy now growing at an even lower run-rate than in Q2 2010. Furthermore, with commodity costs spiking, and food prices soaring, not to mention a presidential election 2 months after the meeting, any hopes of a Fed announcement will promptly be dashed.
But that will not prevent the market from once again entering into the "no news is good news... and bad news is even better" mode for at least a little longer, and certainly until September comes and reminds us that nothing has been fixed neither in Europe nor anywhere else.
Finally, one notable presence at this year's Jackson Hole meeting will be Mario Draghi who will speak on September 1, and will likely rehash everything he has said... and nothing he has actually done, which to date is absolutely nothing but talk.