A survey released yesterday on the subject of the markets’ expectation for the future size Federal Reserve balance sheet has me curious regarding what another round of quantitative easing (QE) would mean for the equity markets. 70% of survey respondents believe the Federal Reserve will resume QE with the average expected increase in balance sheet size being $500 billion. Several people have already weighed in with their opinion on what QE2 would mean for the markets. David Tepper, president & founder of Appaloosa Management, says there are only two scenarios (h/t pragcap.com): 1. The economy improves and stocks rise; or 2. The economy will decline and the Fed will induce a rally in stocks via QE. According to David Rosenberg, chief economist at Gluskin Sheff, Tepper is forgetting a third scenario in where,
“the economy weakens to such an extent that the Fed does indeed re-engage in QE, but that it does not work. So the “E” goes down and the P/E multiple does not expand.”