The MSCI world index has rallied more than 11 per cent since the end of May in anticipation of central bank support for the global economy.

Recent experience suggests the optimism is overdone, setting the stage for investor disappointment.

Beginning in November 2010, the Fed’s QE2 Operation Twist program caused a major, temporary “risk on” rally in economically sensitive resource stocks, but had little impact on the global economy. The end result was a round trip for Canadian investors that saw the S&P/TSX diversified mining index jump 90 per cent before retracing all of the gains.

In hindsight, the global equity rally that accompanied the Fed’s QE2 open market actions was a clear case of investor over-exuberance. BMO Nesbitt Burns economist Douglas Porter believes that investors in the current market are running similar risks: “I don’t believe QE3 is going to make that much of a difference,” said Mr. Porter, adding that “it is so well anticipated that it may well wind up being a wet noodle” for investors.

In November 2010, the Fed announced QE2, a $600-billion (U.S.) program of long-term U.S. Treasury purchases designed to force longer-term interest rates lower.

The strategy appears to have helped the U.S. housing market (by reducing mortgage rates) and it stabilized credit conditions. But equity investors who piled into stocks in the hopes that QE2 would incite the global economy were disappointed. After rising 16 per cent in the five months after November, global equities fell 20.4 per cent between April and September 2011.

Clearly, the worsening European financial crisis through 2011 offset the potential positive effects of QE2. The hope is that another negative event of that scale will not derail QE3 and the Fed’s stimulative efforts will have greater positive effect.

Importantly, the impact of expected Fed actions this year will be boosted by the European Central Bank and The People’s Bank of China. The ECB recently announced plans to purchase unlimited amounts of shorter-term government debt issued by the beleaguered governments of Spain, Italy, Portugal and Greece. China has eased credit conditions to increase funds available for investment.

Mr. Porter notes, however that “the audience is getting a bit tougher with every Fed action,” suggesting that the mixed success of QE2 will lead to greater skepticism as to the potential positive impact of new central bank initiatives.