Some simple tests
One of the hard parts about dissecting the QE and 0% interest rate policy (ZIRP) era, is it has been going on in one form or another since November 2008 when the newly elected Obama administration let it be known it would not allow further major financial failures on its watch. As a result, a large number of potential sample periods are available. Let’s shorten the period and reduce the number of division to these:
Period 0: April 4 – June 1, 2012
Period 1: June 4, 2012 – May 21, 2013
Period 2: May 22 – Sept. 17, 2013
Period 3: Sept. 18 – Dec. 17, 2013
Period 4: Dec. 18, 2013 – Feb. 27, 2014
Period 0, to be used for statistical purposes only, was a period when it appeared no further expansion of QE or yield-curve twisting was in order. Period 1 corresponds to the period when a bad employment report led the market to start pricing in QE3; it subsumes not only the initiation of QE3 in September 2012 but its expansion in December 2012 and the initiation of “Abenomics” in Japan in November 2012. Period 2 was the period in which the markets first started to anticipate tapering of QE; it ended when the FOMC postponed tapering at its September 2013 meeting. Period 3 was the interregnum until tapering actually began in December 2013, which begins Period 4.
If QE policy was a significant factor in market returns, each period’s returns should differ markedly from those of its predecessor. Conversely, if the market started to ignore the various ups and downs of monetary policy, the probability of a period differing from its predecessor will be lower. Let’s run these tests for the total returns on the Russell 3000 index, for seven- to 10-year T-bonds and for the total returns on both investment-grade and high-yield corporate bonds.
The total return on the U.S. stock market can be measured with the Russell 3000 index. The total return stream across the five different periods does not change visibly from one period to the next, but as appearances can be deceiving, let’s run the numbers (see “The beat goes on,” below).
The results here show the stock market learned to ignore the Federal Reserve quickly. The probability each period differed from its predecessor declined consistently from one period to the next. Moreover, the average return for the post-December 2013 tapering period was higher than those of its two preceding periods, and at an average daily return of 0.104% that was almost as high as the QE3 period. If the stock market is but a slave to QE, it does a very good job of hiding it.