The Day Ahead: The Fed Is Like an Old Flame

Heartbreak, to put it mildly, is the pits. Through the years, I have broken down relationship-induced heartbreak into four stages: (1) initial anxiousness that the gaping void in your life will never be filled again (week one); (2) raging anger at the other person for their serious judgment error in dumping you (week two); (3) healing process begins by exterminating all physical evidence of the relationship and hitting the "scene" (week three); and (4) wiping the other person clear from your head, except for certain remembrances that are inevitable along the way (week four and beyond).

As we prepare to conclude the latest earth-shattering finance moment that most people know nothing about or care to understand -- the Federal Reserve meeting and a press conference from Ben Bernanke, the most powerful man on Earth -- one thing is obvious to me. Namely, investors remember the Fed's easing efforts as fondly as they do an old flame five years post-breakup.

Why? To be honest, the first and second rounds of quantitative easing, Operation Twist 1 and Operation Twist 2 have all had profound impacts on mortgage rates and stock prices. That's because they were blunt-force actions. They came in large slugs, or denominations, if you will, meant to address very specific and severe dislocations in the economy -- and in the stock market, though Bernanke won't officially admit that. These dislocations were a byproduct of the fact that the Great Recession was never allowed to heal on its own. (Lob that one up for debate among your Republican friends.)

Your Fed at a Glance

• November 2008: $600 billion QE plan
• March 2009: $750 billion QE plan
• Note: After QE1 ended in March 2010, the S&P 500 was higher by 73% or so vs. March 2009.
• November 2010: $600 billion QE plan
• Note: From November 2010 to June 2011, the S&P 500 rose 11%.
• Operation Twist 1: September 2011
• Operation Twist 2: June 2012

Fond memories:

• Boost to stock prices immediately, and then over a longer period
• Eventually set the stage for the housing market's 2012 recovery
• Companies are issuing new debt at attractive rates, buying back stock, increasing dividends and improving their capital structure by refinancing.
• The Fed has shown investors globally the full range of tools at its disposal. Pre-Bernanke, not many had been aware these abilities existed. (You didn't, so stop.)

Surely there have been other granular outcomes of unconventional -- and conventional -- easing, but why be boring? The problem I'm seeing right now is that investors remember the abnormal easing process in the most positive light. However, as with an old flame, when you stumble on Facebook pictures of them with someone new, an examination of the present-day realities is likely to reveal sharp differences from the past. People change -- and, in this example, the market's reaction to a different style of easing may be different as well.

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