Are you ready for QE3?
The Fed hasn’t officially announced its much-anticipated third round of quantitative easing yet, but the odds that more stimulus is in the offing rose this week after Wall Street Journal reporter Jon Hilsenrath wrote, “Federal Reserve officials, impatient with the economy’s disappointing performance, are moving closer to taking new actions to spur growth and employment if they don’t see evidence soon that activity is picking up on its own.”
Ordinarily, this sort of report might not have much of an impact, but Hilsenrath is widely viewed as the Fed’s media mouthpiece. If such a statement appears in one of his articles, there’s a good chance it has been planted there by the Fed. Investors can debate whether this sort of approach is necessary, but — as economist Stephen Roach noted in the wake of the article — Hilsenrath’s track record is perfect.
The takeaway: It’s time to prepare for an official announcement regarding QE3, either at the Fed’s July 31-Aug. 1 meeting or at its Jackson Hole symposium in late August.
To do so, it’s worth looking back at financial market performance following the announcements of the last two rounds of quantitative easing. Keep in mind, however, that this is only a guide — each round of quantitative easing and the first Operation Twist have had a diminishing impact on financial assets. More recently, the Long Term Refinancing Operation (LTRO) announced by the European Central Bank only provided about three months of gains for the markets. This data therefore needs to be taken with several grains of salt — especially in light of the muted initial reaction to the Hilsenrath article.
With that said, the table below shows that the U.S. market has risen reliably in the periods immediately following QE announcements.
|Group||Ticker||QE1 Announced||QE1 Expanded||QE2 Announced|
|The dates used are as follows: QE1 announced, 11/24/08; QE1 expanded, 3/18/09; QE2 announced, 8/24/10. Aug. 24 wasn’t the official announcement, but the initial hint by Ben Benanke at the 2010 Jackson Hole symposium.|
Consumer discretionary, materials and industrials stocks have been reliable outperformers — exceeding the S&P 500 return on all three occasions — with consumer discretionary providing the largest gains. This shouldn’t be a surprise, since all of these groups are among the most economically sensitive. The Select Sector Technology SPDR (NYSE:XLK) also was a source of strong returns during the post-QE periods.
The Select Sector Utilities SPDR (NYSE:XLU) and Select Sector Consumer Staples SPDR (NYSE:XLP) were both three-time losers, which also isn’t startling due to their defensive nature. Given that these are the two best-performing sectors in the trailing 12-month period, this might not be the worst time to take some money off the table in these sectors and redeploy it elsewhere.
Perhaps the most surprising result is that energy — which typically would be expected to track materials and industrials in a rally — wasn’t among the sectors that provided market-beating returns. Instead, the Select Sector Energy SPDR (NYSE:XLE) actually underperformed the S&P in each of the months following QE announcements.
Another notable result was the underperformance of the SPDR Gold Trust (NYSE:GLD). The conventional wisdom is that “money printing” should benefit gold, but the evidence shows that this hasn’t been the case so far. GLD rallied in the days following the Wall Street Journal story, however, indicating that it might show a little bit more life this time around.
The bottom line: It’s a long shot to expect a similar set of circumstances to bring about the same result four times in a row. Still, history shows that for investors looking to play QE3, a long position in Select Sector Consumer Discretionary SPDR (NYSE:XLY) might be the best bet.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.