QE2 Is Actually Accomplishing Its Stated Goal

With the announcement and subsequent beginning of the Federal Reserve’s second round of quantitative easing (QE2) we have seen equity markets move off their highs; this has sparked pundit after pundit expounding about how QE2 has “failed before it began” and how “worthless” it’s effect will be.

It should be noted that these quotes illustrate an opinion, though do not cite facts. Lets take a step back and look at the facts here. Since the Federal Reserve hinted that further easing might be warranted (roughly late-August) to achieve its inflation target, the following market conditions have occurred:

• Long-term bond yields, as measured by the iShares Barclays 20+ Year Treasury Bond Fund, have fallen slightly and then risen dramatically. Note that from August 13th to August 31st the TLT rose from $101.62 to $108.65 (a 6.91% rally), but since then has fallen and is now trading at $95.70 (an 11.92% decline).

• The S&P 500 (CBOE: SPX) has risen from $1,082 and is now trading at $1,207, which represents an 11.55% rise.

• Over the past 10 days the SPX has corrected from a high of $1,227, losing 1.62% and the TLT has continued to slide, losing 2.9%.

I fail to see how the Federal Reserve has not managed (through jawboning and actual QE2 execution) to boost inflation expectations, boost asset prices, and ensure that economic growth will be spurred higher. Long-term Treasury bond prices have fallen, sending rates higher, and if I remember my high-school economics class correctly, that implies higher inflation and higher economic growth.

Tongue and cheek aside, the Fed has accomplished what they set out to do and market participants should respect that. While this does not mean that stocks are a screaming buy at any level (in fact valuation and economic data now becomes even more important to the overall movement in equities) this does mean that traders and investors have to view positions, corrections, and asset price movement in the overall light of higher growth expectations. 

Michael J. Zerinskas is the Chief Options Strategist at Benzinga.

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