Fed 'credibility' has boosted stocks from the start of its actions; the ECB, however, only since OMT. But as SocGen's cross-asset class research group notes, poor performance of the S&P 500 since QE3 announcement (-1.6%) may well be an initial sign of a loss of impact from the Fed’s policy, and US equity volatility is rising - catching up to Europe's.
S&P 500 and QEs: third time lucky?
During the two phases of QE carried out by the Fed, US stocks appreciated by around 48% at their peaks, on an annualised basis. The rally during Operation Twist was milder, but still strong at +36% (annualised). As a result, the S&P 500 gained about 15% (ann.) in the past four years as the Fed resorted to unconventional policy tools. Security purchases of past QEs have contributed to lowering rates, which is bullish for risky assets like equities. The upcoming purchases of QE3 aim to push stocks even higher. But, as current equity margins are at historical high and in light of the global economic slowdown, can US stock prices continue to climb at the same pace going forward? The poor performance of the S&P 500 since QE3 announcement (-1.6%) may well be an initial sign of a loss of impact from the Fed’s policy.
ECB: increased credibility but politics prevail
Mr Draghi took over as head of the ECB just one year ago, and already the perception of the ECB’s monetary policy has changed radically. The new president has adopted a more “Fed-like” policy: first with the launch of 3-year LTROs in December 2011 to support bank liquidity; and, more recently, with the OMT, the unlimited bond buying programme to support sovereigns. Following Mr Draghi’s pledge to do “whatever it takes” to save the euro and the subsequent announcement of the OMT, the Euro Stoxx 50 rebounded (+15% in 10 weeks).
The ECB has removed some equity tail risk by providing European governments with more time to find solutions to the euro crisis. However, as Spain still has to request bailout help, the implementation of ECB measures remains constrained by political decisions.