QE's Impact On Stock Indexes Overrated?

Includes: AA, AMX, BA, BAC, CAT, DIS, GE, HD, JPM, MCD
by: Vikrant Sitani, CFA

Now the Bureau of Labor Statistics has published the unemployment report, attention of the stock market will be on the various Federal Reserve Governors or President for any signs of clue on Quantitative Easing. Various pundits will sparse every single word on the QE. Any sign of QE and the market will go up and if some other Fed official indicates otherwise, the market will go down. Does QE really help the Indexes?

If one looks at the stock index as of August 2009 when Federal Reserve first gave a hint of QE and the stock index as of today, the market is up by about 39%. This data has been shown by various media outlets and by various stock strategists as QE really helped in the stock.

I think the impact of just QE on stocks is overrated. By focusing on just the index, wrong conclusions may be drawn. Below are some of the stocks of DOW Jones Industrial average.

Below is the stock prices of some of the stocks as August 2009 and price as of July 5 2012.


July 5 2012

August3 2009

% Change

Significant news

Alcoa Inc (NYSE:AA)




Sharp down turn in aluminum prices due to excess capacity.

American Express co (NYSE:AMX)




Credit losses were lower as AMEX strengthened the credit standards for new business.

Bank of America (NYSE:BAC)




Every quarter investors fear Rep and Warranty losses, investors fear the impact of Dodd Frank regulations.

Boeing (NYSE:BA)




787 finally off the ground and is in Production

Caterpillar (NYSE:CAT)




International Sales have increased, predominantly in China due to emphasis on infrastructure investments

General Electric (NYSE:GE)




Company has decided to reduce the focus on GE capital

Home Depot Inc (NYSE:HD)




Stock has doubled in the past one year.





Warren Buffett has taken a significant stake in the company.

JPMorgan Chase and Co (NYSE:JPM)




Trading losses and impact of Dodd-Frank regulations

McDonald's Corp (NYSE:MCD)




Introduction of healthy options and focus on international operations have increased sales.

DIS Walt Disney Co (NYSE:DIS)




Most of the growth in share price happened in last one year. Increase in rating of ABC.

Dow Jones Index




Sources: Bloomberg, CNBC.

The 39% growth in index is due to average of various changes in various stocks. Looking above price changes is not uniform. Some of the companies had a negative return and some of them were above 75%. Even in the individual sectors the individual distribution of returns in the companies are quite different. In the financial sector AMEX is up 107% vs BAC is down 49%. I have tried to put some significant news for some of the stocks

The main goal of QE was to reduce the long term rate of interest. If one goes through the individual analyst reports of each of stocks by various sell side stock analyst, 10 year treasury rate does not predominantly as the main reason affecting the individual company's prospect. However there are various editorial and co-oped written by academics suggest that QE helps in the stock market.

Most of the above companies' growth came from growth in their International operations. If one listens to the earnings calls, neither the company nor the sell side analyst have raised many questions relating to the impact of QE. The question relating to impact of long term interest rates appears predominantly in the insurance companies and Banking companies. Even in these companies, it is more about how reduction in long term interest rates is having a negative impact on their earnings.

Bottom line: When the next QE is announced, don't rush to buy the index on that day, as one would be buying the index at a much higher price. The index would be certainly higher as the market assumes that QE would be the driver for earnings growth for all stocks; consequently the index will be higher. Market professionals should focus on individual stocks rather than take a call on the index based on QE.

Disclosure: I am long BAC.

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