Stocks have recovered most of the post-election losses on hopes of a ‘Fiscal Cliff’ resolution. But the positive market momentum may not solely be centered on the ‘Cliff’ question – growing hopes of further support from the Bernanke team also may be at play here. Favorable economic data such as the positive start to the holiday shopping season and continued momentum in the housing sector also help. This morning’s positive revision to third quarter GDP to 2.7% from the original 2% and the decline in initial Jobless Claims would also fall in the latter category.
‘Operation Twist’, in which the Fed uses roughly $45 billion a month in sales proceeds of its short-term treasury bonds to purchase longer dated instruments, is coming to an end at the end of December. The program was to end earlier, but the central bank extended it through the end of the year at the time of initiating the open-ended QE3 program, in which it purchases $40 billion a month of mortgage-backed securities. Bernanke had indicated at his September news conference that the FOMC would review all the ongoing asset purchase programs at the of the year. And the time for that review is fast coming up at the December 11-12 FOMC meeting.
The prospect of an open-ended QE4 to replace Operation Twist could very well more than just speculation. Many FOMC members, including Bernanke, believe that the Fed’s multiple bond-purchase programs since 2008 have been beneficial to the economic recovery. Some studies of QE1 and QE2 credit the $2.3 trillion in asset purchases under those programs to contributing approximately 3% in GDP growth. It is perhaps premature to credit QE3 with the positive developments in the housing sector, but I am sure there is no shortage of those who will do just that.
Bernanke has acknowledged the diminishing value and potential for market distortions of these unconventional monetary measures. But many on the FOMC would be tempted to offset the ‘Fiscal Cliff’ drag with a new round of treasury bond purchases. May be the Fed will decide to wait till March to make such a call, but it will be impossible to undo the damage by then should the economy stumble due to the ‘Fiscal Cliff’.
In corporate news, we got weaker than expected November same-store sales numbers from Target (TGT), Gap (GPS), Kohl’s (KSS) and others, likely a result of Sandy-related disruptions. Disney (DIS) announced a 25% increase in its quarterly dividend.