Don’t Fight the ECB?

September 15th Weekly Market Update

The European Central Bank (ECB) announced bold stimulus measures, including further cuts to key interest rates and an asset-backed securities (ABS) purchase plan, on September 4, 2014. The moves are an acknowledgment of the recent deterioration in the Eurozone economy and increased deflation risk. This decision follows the historic move to negative deposit rates initiated back in June of 2014. These measures are geared toward spurring economic growth through easier access to cheaper credit for businesses and households and toward driving prices higher to avoid deflation. These moves may also continue to pressure the euro currency and help boost European exports.

Is this move by the ECB a buy signal for European equities? To help answer that question, we look back at how U.S. stocks reacted to our own monetary stimulus through quantitative easing (QE). Although Europe has not engaged in outright QE (where the ECB buys government bonds directly), it may in the future. With essentially zero interest rates (or lower), and the addition of bond purchases, these ECB moves are similar to the Federal Reserve’s (Fed) moves.

Buying stocks after the various QE programs were announced by the Federal Reserve was generally a profitable decision for investors, although earlier programs (QE1 in November 2008 and QE2 in November 2010) turned out to be less compelling opportunities. Except for Operation Twist (where the Fed sold shorter duration securities to fund the purchase of longer-dated ones to keep long-term interest rates low), announced on September 21, 2011, it really took about a year for the stock market to react positively to the Fed. It is worth noting, though, that some market gains came in anticipation of these program launches. In addition, the expansion of QE1 that came in March 2009 that added U.S. Treasuries to the program did coincide with the stock market’s strong rally off the bottom beginning on March 10, 2009.

For the full article: Don’t Fight the ECB?