Operation Twist 2 - Not Enough?? - John Rothe | Portfolio Manager, Quant, Tech Geek, And Sometime Superhero To My Kids

Operation Twist 2 – Not Enough??

Rumors have been flying around this week that the Fed will soon be announcing Operation Twist 2 – i.e. a continuation of the current Fed “stimulus” package.

In past posts, I have mentioned the following chart which shows the correlation between Fed action and the stock market:

For the past few days, the US equity market has been behaving as if another stimulus package has already been announced. This is understandable as this is an election year and the economy will probably be the #1 discussion. The Fed and President Obama will act early to add stimulus to the system – if not, November’s re-election chances will be hurt.

However, the current rumor that there will be an Operation Twist 2, may not be well received by the stock market. While researching these “rumors”, I came across two interesting charts:

While investors who look at the first chart I posted may get excited about Operation Twist 2, a closer look shows that the Fed may need to do more to stimulate stock prices. The first Operation Twist only helped equity prices when the European Central Bank also carried out its own Long-Term Refinancing Operation (LTRO). It was only during the time that both Operation Twist and LTRO overlapped that the stock market entered into a “euphoria”. Without both programs running at the same time, US equities didn’t perform too well.

If the Fed wants to stimulate the economy via the stock market (as it has in the past), the Fed will need the help of a European program (which is likely considering the trouble that some European banks are in) or will need to present a much larger “Twist” than last time.

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