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(The Globe and Mail)

Behind the Numbers

Fed medicine may cause side effects, including anxiety Add to ...

“What a drag it is getting old,” Mick Jagger sings on Mother’s Little Helper, the Rolling Stones’ take on a growing trend among suburban English housewives in the sixties: taking barbiturates or Valium to make it through the inanity of everyday life.

Sometimes you need a Little Helper for more pressing matters. Ben Bernanke would certainly agree after three attempts to stimulate the stalled U.S. economy with doses of quantitative easing, or QE. Mr. Bernanke’s medicine is meant to provide a lift to the stock market and GDP growth, but signs are appearing that his latest mood booster – QE3, announced Sept. 13 – is having a tough time counteracting the economy’s lethargy. In an echo of the Stones’s lyrics, the National Bank of Canada’s November Equity Monitor report calls the equity market’s lacklustre recent performance “a drag.” The barely-there effect of QE3 on U.S. equity markets can be illustrated by examining the trajectory of the S&P 500 stock market index after previous quantitative easing efforts and comparing it to the September announcement.

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The index returned 3.7 per cent in the 31 trading days following QE2’s announcement, but fell 3.3 per cent in the same period after Mr. Bernanke announced QE3. It appears the central bank’s pharmaceuticals may be losing their potency.

Seven of the 10 S&P 500 sectors have been money losers so far in the fourth quarter, with only the financial industry pulling ahead by 1.3 per cent. All of the other sectors, the report says, “are barely meeting lowered expectations.”

With such poor results even in light of QE3, National Bank says, “global economic weakness is being felt in the top lines of large U.S. corporations.”

The bottom lines aren’t so pretty either. “The stage [has] been set for disappointing results by the highest ratio of negative to positive [earnings] preannouncements since the last recession, giving analysts good reason to revise down their expectations,” the report says. But it could have been worse, says Matthieu Arseneau, a senior economist with National Bank and one of the report’s authors. “Given that investors had anticipated the Fed’s move during the summer, the stock market performance would have been much worse without this support,” he said.

Right now, QE3 is losing a “tug of war” against less than impressive corporate earnings, he said, but “we can assume that QE3 had a positive impact and will continue to … by increasing somewhat the price investors are willing to pay for a given dollar of profit.”

While the Stones’ Little Helper erased worries, Mr. Bernanke’s medicine should put investors’ nerves on full alert. Most global stock markets have managed to post gains in the year to date, but “complacency would be ill-advised,” the report cautions. “Current valuations may reflect too much good news.”

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