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While the market may be expecting the end of QE2 to rattle equities like the end of QE1 did, JPMorgan analysts expect a more timid response this time around.Last time, equities sold off at the end of the Fed’s program, with prices falling 16%. This tim, JPMorgan analysts expect stock markets to remain flat in June-September, but commodities to selloff.
They have three reasons why:
- Dividends and earnings per share for stocks are up 12-13% since QE2 was first mentioned, suggesting that half of the rise in stocks post QE2 is the result of real cash returns on stocks and future earnings power.
- Valuation expansion has been weaker in QE2, suggesting stocks have less to lose. Equity risk premium has fallen since the start of QE2, down 1.38% to 4.83%. Prior to QE2, the risk premium was at a 60-year high. It remains above the 10-year average. The next 12-month price to earnings ratio remains below the long-term average of 15-16X, at 13.5X.
- Commodity prices have been the real winner as a result of QE2. While stocks are up 26% since QE2, commodities are up 27%, with oil up 36%. This is not entirely the result of the dollar, which has only declined 9% since the start of QE2. The value of S&P futures contracts are up only 3%, for commodities it’s 41%, with other signs that speculation in higher in commodities.
While real prices of commodities and stocks have risen pretty much in lockstep in the wake of QE2, futures contracts show just how much more money is in the commodities space.