McKinsey Global Institute director Richard Dobbs argues that QE hasnt had a big effect on stocks, with CNBCs Jackie DeAngelis and the Futures Now Traders. Many credit the Federal Reserves quantitative easing program for the stock markets 25 percent rally this year, but a new research report from the McKinsey Global Institute suggests that the impact of QE on the market has been badly overblown. Rather than looking to the low interest rates fostered by the Fed, the main author of the report, Richard Dobbs, says that stocks have rallied on the back of stronger corporate fundamentals. The market is not being driven up by QE, Dobbs said on Thursdays episode of Futures Now. The reason the markets up is that profits are up and that cash levels are up in companies. Dobbs, who is the London-based director of the McKinsey Global Institute, said that the market has been fooled by the short-term reactions to QE-related news. If you look at the announcements of QE programs ending or being continued, you do get short-term movements, Dobbs acknowledged. But if you look at the following week, those moves get unwound. So were not seeing the short-term thing sustaining. (Read more: For Fed Chair Yellen, it was a perfect hearing) But what of the oft-made argument that by squashing interest rates, the Feds QE program leads investors to exit bonds and seek out a higher return in stocks? In the Wednesday report, entitled QE and ultra-low interest rates: Distributional effects and risks, Dobbs and his co-authors write that this rationale only makes sense if investors see equity investment as a true substitute for fixed-income investment. There are reasons to believe that this is not the case. For example, equity markets have been highly volatile since the start of the crisis, which in all likelihood should persuade many fixed-income investors to avoid investing in these markets. Andrew Harrer | Bloomberg | Getty Images Federal Reserve Chairman Ben Bernanke Stocks and bonds, then, are not perfect substitutes, and it doesnt appear that investors have sold the one to buy the other. After all, Dobbs asks, if the recent rally is largely due to investors being forced to buy stocks, then wouldnt we see valuation metrics move much higher? We started off by thinking that we wanted to be able to show how QE and ultra-low interest rates have actually boosted the equity markets. The trouble is, when we actually look at the fundamental valuations, as measured by things like the price-to-earnings ratio and the market-to-book ratio, the markets in line with its 50-year average, Dobbs said. (Read more: The deceptively simple reason stocks wont quit) Yet while Dobbs says that the long-term impacts of QE have been badly overstated, he says that short-term traders can keep acting like the Fed is the main driver behind the market. If youre a day trader, you can make money by betting ahead of [Fed announcements] on the short-term movement, Dobbs said. So I dont think theyre necessarily wrong in terms of one day. Just do the trade, make the money and get out. —By CNBCs Alex Rosenberg. Follow him on Twitter: @CNBCAlex.
Posted on: Thu, 14 Nov 2013 21:00:49 +0000
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