Stocks rallied strongly last week in response to comments by Mario Draghi that signaled a willingness, a determination in fact, to engage in more monetary stimulus. In fact, Draghi seemed to promise – once again – to do “whatever it takes”, offering to consider “a whole menu of monetary policy instruments” in saying that the ECB was now “vigilant”. One wonders why they were less than vigilant before last week but the market didn’t much care about that.  Apparently the use of the V word is code in Europe for more interest rate cuts – a minus sign by itself apparently not sufficient to revive the sclerotic European economy – something of which I was blissfully unaware until Friday. Stock market punters certainly got the message and bid stocks higher the world over, presumably in anticipation of better growth.

Why exactly more monetary stimulus now – after repeated applications of extreme policy in recent years – should be expected to produce more growth is a bit of a mystery. To date, there is no country one can point to and say that QE was an unmitigated success, that it restored a country’s economy to full health. And I doubt there ever will be since it only gets applied in countries or regions that are having severe economic problems, generally ones that are immune to monetary nostrums. You can’t fix fiscal and regulatory problems with more bank reserves and a cheaper currency.

Nevertheless, monetary stimulus in whatever form has become associated since the last economic crisis with rising stock prices and the mere hint of more stimulates, if nothing else, the algorithms that do most of the trading these days. Like Pavlov’s dogs, no actual stimulus is even required. A hint, a dog whistle or just weak economic data will do. Anything that rings the monetary bell triggers the risk taking salivary glands.

The connection between monetary stimulus and the stock market is a tenuous one that runs, ultimately, through corporate profits and therefore, to some degree, economic growth. In the past, monetary stimulus – rate cuts – was associated with weak stock market performance because it was applied when the economy was weakening and there was a presumed lag between a change in policy and its ultimate effect. Monetary policy works with long and variable lags as the economists put it. So, monetary stimulus was good for stocks but not right now; more stimulus was a sign of failure, that previous cuts weren’t sufficient, in the judgment of the central bank, to revive growth.