Remembering November: QE2 vs. Bernanke's Expectations

The books are closed on November. Alas, there’s little joy in the broad stock market.

After we got “the best September since 1939”…and “the best October since 2003”…all we have this morning is “a November that wasn’t as bad as 2008.” Gee, swell.

Of course, there’s more significance to the monthly figure than just the comedown from the hype earlier this fall. That’s because November was the first month of the second round of quantitative easing or “QE2” – the Federal Reserve’s plan to buy $600 billion in Treasuries over the next eight months.

What happened? It was supposed to goose the stock market. Fed chief Ben Bernanke said so.

“This approach eased financial conditions in the past and, so far, looks to be effective again,” he wrote in The Washington Post on Nov. 4, the day after the decision was announced. “Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action.”

But in a classic case of “buy the rumor, sell the news,” here’s what happened to the Dow in November…

Dow Jones Industrial in November

Nice pop, but didn’t last. Oh, and since Ben brought up long-term interest rates, here’s a chart of the 30-year Treasury bond…

30-Year Treasury Bond Rates in November

But we don’t mean to interrupt Ben while he’s on a roll: “Easier financial conditions will promote economic growth,” he continued. “For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance.”

Lower mortgage rates? Hmmm, don’t see that here…

30-Year Fixed Mortgage Rates in November

“Lower corporate bond rates will encourage investment,” Bernanke persists.

Here’s a chart of LQD, a large corporate bond ETF…

November Performance of iShares iBoxx $ Invest Grade Corp Bond (LQD)

The one thing Bernanke didn’t address in his op-ed was the gold price. But you already know how he feels about that – if it goes up, that’s the market voting no-confidence on his policies.

November Performance of GLD

Granted, it’s only been a month. But so far, nothing appears to be going in the direction Bernanke wants it to. We wouldn’t be surprised if this continued into the first few months of 2011. But Ben probably would. And so it goes.

Dave Gonigam
for The Daily Reckoning