ON 3 March 2009, US President Obama became a stock market guru when he delivered the following to investors: “What you’re now seeing is profit and earnings ratios starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.”

In hindsight, that really was some call. Last March the S&P was trading around 683, and although stocks fell further that week, the market bounced sharply and closed the week at 689. From there on, stock indices have not looked back – the S&P hit 1,113 earlier this year, pretty much where we are trading today.

Although both the bulls and the bears point to unprecedented worldwide stimulus as the driver for this rally, the bulls say that the recovery is now self-evident and self-sustaining, while bears say that asset prices would be testing new lows if stimulus was withdrawn. We have avoided a financial meltdown but at a very steep cost. Budget deficits are stretched and still have to be financed.

But in less than a month, the Fed will end its purchases of mortgage backed securities, the major part of the US government’s $1.72 trillion quantitative easing programme, and which has kept mortgage rates low. It has also helped to fund the US fiscal deficit because the institutions that sold mortgage securities either left the dollars raised with the Fed or purchased US government debt. So what happens when this ends or how will investors react if it is extended?

At the end of 2009, the caps on support to government-sponsored mortgage giants Freddie Mac and Fannie Mae were removed. Both institutions can now receive unlimited state aid and could prop up the mortgage market, replacing the MBS purchases. It looks like we can expect US quantitative easing to continue in some form. But it still has to be financed; and considering the outlook for equities, will the President tell us when he thinks it’s a good time to take profits?