Tags: Bespoke | stocks | Fed | QE

Bespoke Investment Group: Stocks Have History of Falling After End of QE

Thursday, 14 Aug 2014 09:39 AM

By Dan Weil

The Federal Reserve currently plans to finish its third round of quantitative easing (QE) in October.

So what does that mean for stocks? Nothing good if history is any guide.

The stock market declined after the end of both previous rounds of bond purchases by the Fed, USA Today notes. And already stocks have slowed their gains since the Fed's tapering began in December.

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It's now buying $25 billion of bonds per month, down from $85 billion before the tapering.

During the Fed's QE periods, the S&P 500 index has posted double-digit gains, according to a report from Bespoke Investment Group. That includes a 33 percent advance since QE3 started in September 2012.

But the index dropped 9 percent between QE1 and the Fed's initial talk of QE2 (March 2010 to August 2010) and 12 percent between QE2 and the beginning of Operation Twist (June 2011 to September 2011).

"The fear with the taper is that markets will see a repeat of what transpired back in 2010 and 2011 when QE1 and QE2 were wound down," Bespoke Co-Founder Paul Hickey writes in the report.

"Whether [stocks losing steam] is due to the taper or not is up for debate," he notes, according to USA Today. "But if the taper bears responsibility [for] the rally's slowdown, it would bode poorly for the end of the year when the taper is fully wound down in October."

Market participants say the Fed's massive easing program continues to provide support for stocks.

"The retail numbers might suggest that the Fed is not going to be so aggressive in raising rates any time soon," Bruce Bittles, chief investment strategist at RW Baird, tells Bloomberg.

"That has been the backbone of the market for the past five years."

Retail sales were unchanged in July, the weakest showing in six months.

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