Is QE Ending? A Preemptive Analysis of the Impact of a Stoppage of QE

Tomorrow, May 22nd, 2013 the Fed's Ben Bernanke will speak at 10 am on the future of the US QE policy of buying bonds every month. Earlier today, two speakers hinted at the future of the QE program, suggesting that the program is not close to ending, sparking the 19th consecutive positive close for the US Stock Market. 

The first speaker, New York Fed President William Dudley spoke to the effectiveness of the program thus far, however he also said that he was not sure what the next best move was, whether an increase or decrease in the pace of bond buying. 

St Louis Fed President James Bullard was the second speaker, saying that the government should continue with the current program, modifying it as needed when the inflation and growth data is released. It is of his opinion that the current QE program has been very efficient and will continue to aid the economy. 

For those who aren't aware, the goal of the QE program is to keep the economy up by boosting economic growth and lowering the jobless rate. As Bullard said, it is up to these sets of data to be able to definitively say whether or not the method has been effective towards the stated goals.

“Broadly speaking, investors are really waiting to see what Mr. Bernanke is going to say in front of Congress,” said Andrew Wilkinson, chief economic strategist for Miller Tabak. “The next 20 points in the S&P 500 are probably predicated on what he has to say.”

So the question remains, what happens when the music stops? If Bernanke decides that the country has had enough QE, what is next? An insight into this question can be found if you observe the actions of the S&P with and without the boost of QE. As calculated by the good folks at www.zerohedge.com, the increase with QE is +1,142.5 points. Without? -290.6 points. Although not as dire as some people would like, it is worrying nonetheless. It seems logical to believe the next step of a removal of QE from the fundamental picture is an immediate drop in the S&P, how much is anyones guess. However if one looks at the amount of time that QE has been assisting the S&P and how many days it hasn't been in the past few years, it comes out to approximately a point per day(+1142.5 points, 1230 days, or .93 points per day) of positive for QE assistance, and approximately a point per day (-290.6 points, 289 days, or 1.01 points per day). This is a very basic average, but over time it probably will even out to a point per day movement after an initial reaction.

The bulls are out in full force, as recent firms Goldman Sachs and Deutschebank raised outlooks for year-end S&P numbers to 1750 and 1800, respectively. This implies that they both believe QE is far from over, as the only way many traders see these goals being hit is with the assistance of the Fed and QE continuing strong.