Quantitative Easing and the U.S. Stock Market

June 15, 2011 | Doug Oest, CAIA, Managing Partner

In an attempt to stimulate economic growth, the Federal Reserve (the “Fed”) has used multiple monetary policy tools in the past few years: reducing short-term interest rates to virtually zero, introducing numerous facilities to stabilize specific areas of the market, and implementing quantitative easing (“QE”) programs. Announced in late 2008, the first round of quantitative easing (“QE1”) involved the purchase of $100 billion of government sponsored entity obligations and $500 billion of mortgage backed securities. After its effectiveness was reconsidered, QE1 was expanded in March 2009 with the Fed purchasing $1.25 trillion in mortgage backed securities and up to $300 billion of longer term Treasury securities. This massive increase in the Fed’s balance sheet is evident in the chart above, which depicts the securities held outright by the Fed – along with movement of the S&P 500 Index – since 2007. The equity markets rallied more than 50% from the inception of QE1 to its completion; however, once QE1 purchases stopped and the market experienced several troubling issues including riots in Greece and the “Flash Crash” of May 6, 2010, the equity markets experienced a sharp pullback.

In late August 2010, Fed Chairman Ben Bernanke hinted at a second round of quantitative easing (“QE2”) during a speech in Jackson Hole, Wyoming. After the official announcement of an additional $600 billion in longer term Treasury purchases, Chairman Bernanke wrote about QE2 in an op-ed piece for the Washington Post. He noted that QE programs have “eased financial conditions in the past and, so far, look to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action”. He continued, “Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion”. Since the Jackson Hole speech in August 2010, the equity markets rallied nearly 30% through the end of April, 2011.

However, with the culmination of QE2 approaching at the end of June, a recent round of subpar economic news and a decline in the equity markets that erased nearly all of 2011’s year-to-date gains, eyes have turned backed to the Fed to see if additional policy measures will be implemented. During his speech on June 7th, Chairman Bernanke failed to hint of another round of QE as he did in his Jackson Hole speech. Following the speech, several major financial institutions, including Goldman Sachs, JP Morgan, and PIMCO, have stated that the Fed is unlikely to initiate another round of QE, which would leave the markets without ongoing support from the Fed for the second time in nearly three years.

Doug Oest, CAIA
Managing Partner

Get to Know Doug

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Related Content


Disappointments to the Downside

Many readers likely know that when it comes to investor sentiment and market performance, economic results relative to forecasts can…


“Renew” Your Opinion on Policy Bets

During election season, investors are often tempted to position their portfolios based on expectations related to potential changes in government…


Airline Stocks: Just Plane Challenged

Although travelers have happily bid farewell to pandemic-related restrictions and returned to the skies en masse, airline stocks seem to…


Credit Check

Interest in private credit has grown considerably in recent years and the asset class has moved from a relatively small…


The Capital Structure Shuffle

In the years following the Global Financial Crisis, issuing new debt was an easy decision for companies looking to raise…


A Jolt from JOLTS?

Throughout history, the state of the domestic labor market has typically served as a reliable indicator of the overall health…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >