Stock Market's Three-Year Rally Has Fed to Thank

By Patti Domm, CNBC Executive News Editor

NEW YORK (CNBC) --Federal Reserve easing has helped fire up one of the strongest stock market rebounds ever, and the promise of more is keeping it going.

The chart of the S&P 500's more-than-100 percent run -- from its March 2009 low of 666 to its current 1340-plus level -- generally depicts the most powerful comeback of the past seven cyclical stock market recoveries, Wells Fargo(WFC) Advisors analysts say.

Yet, unlike some of those other periods, the economic recovery has been sluggish and nearly stumbled.

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In the nearly three-year run, the S&P 500 reached its cyclical high of 1,370 in May 2011. That was just before the Fed's "QE2," or its second quantitative easing program came to an end at the end of June. The Fed purchased $600 billion Treasury securities under that program in an effort to drive rates lower and send investors into riskier assets -- like stocks.

From May through early October, the stock market moved lower as the debt ceiling debate raged in Washington, and the economy and Europe worried markets.

The S&P bottomed in early October at 1,074, just as the Fed embarked on yet another program, "operation twist." The "twist" involves Fed purchases of longer duration Treasurys, using the proceeds from sales of shorter term securities.

The S&P 500 since then has gained more than 22 percent, hitting occasional bumps related to the European debt crisis.

Coincidental or not, the Fed has been there whenever the bull has needed an extra push.

Stuart Freeman, chief equity strategist for Wells Fargo Advisors, said the Fed's easing programs, aside from the improved economy, has definitely been a factor driving stocks.

"We probably wouldn't have reached 1,370 until maybe the middle of this year" were it not for the Fed's activity, said Freeman. He noted that the announcement of QE2 last year drove the S&P well above the rest of the prior stock rebound cycles by April and May, and well above his then year end target of 1,250-1,275. (see chart here)

Freeman says that as QE2 came to an end, investors anticipated that the economy might slow without help from the Fed, and it proceeded to move lower during the softer economic period last summer. The S&P, at that point, was performing below the levels of recoveries in the early 1980s and the early 1970s.

He cautions the same thing could happen this year, with the bull galloping too far ahead of where it may ultimately end up finishing the year. Feeding the bull once more is the promise of more Fed easing.