QE and Stocks: The Japanese Experience

Since QE2 was pre-announced in late August, stocks have been on a tear. They pulled back a bit when QE2 was announced in early November, but have since continued to rise. Many people believe they will continue to rise as long as the Fed continues QE. The Japanese experience would agree. This chart (courtesy The Casey Report) shows how a massive dose of QE lifted stocks, which promptly fell back when QE was ended after a one-quarter lag:

What seems different this time than with Japan is the meltdown in Treasuries. Could that scuttle the stock rally? Casey Research thinks not. Alex Daley, Casey’s Extraordinary Technology, comments:

[I] do see at least one compelling reason to stay net long in equities right now: The wheels are coming off the bond market.

And that means money is flowing into equities in a major way. Excess liquidity, especially in the sheer proportions now flowing into the stock markets, tends to drive up asset prices. And the stock markets are seeing liquidity at levels not seen in years. …

[S]ince the beginning of 2009, the net inflows to bond funds have been more than 11x (!) the inflows into stock funds. But as you can see from this graph, that trend is deteriorating rapidly. It’s such an about face that, bond inflows have gone negative for the first time since the crash (and at that time they were only negative because every asset class saw massive withdrawals):

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