What Does QE3 Mean for Investors?

by Hilary Kramer | September 14, 2012 10:00 am

The Federal Reserve gave the market what it has long been waiting for Thursday: A third round of quantitative easing (QE3)[1]. After the central bank wrapped up its two-day policy meeting, Chairman Ben Bernanke announced the Fed will purchase $40 billion a month in mortgage-backed securities until the economy no longer needs the support, in addition to a monthly purchase of $85 billion in bonds through the rest of the year.

The market reacted strongly[2] to the news, sending the Dow, S&P 500 and the NASDAQ up more than 1.5% each. While the response is impressive, I don’t expect the rally to be long-lasting. As I’ve discussed with you before, I think the market has already priced in the possibility for further monetary easing, and I look for the S&P to run into some resistance around 1460 to 1470.

So, while more QE is good for stocks in the near-term, I still think Wall Street still needs to see stronger economic data before confidence can return to the market. Euphoria over QE should die down soon, and when it does, Wall Street will concentrate on third-quarter earnings, where I think we could see some negative trickle down effects from the August manufacturing slump in the U.S., Europe and China.

Weaker corporate earnings could put us on the path to a short-term sell-off, and while I don’t expect a significant correction in the market to take place, I do think we could still see a few more bumps up ahead.

With that in mind, there are several great ways to play the market before the momentum dies down. While I ultimately expect investors’ enthusiasm for QE3 to be short-lived, there’s no doubt that the central bank’s decision to keep interest rates low until mid-2015 is bullish for banks, and I’m eyeing a few financial stocks that are good buys right now.

And the perception that the Fed wants inflation higher could also benefit commodities like oil and gas, making for some exciting opportunities on both the long and the short side. But in addition to short-term plays, I’m also prepping my readers for the long-term growth we’ll see up ahead, through exposure to the sectors I just named, as well as via others that are poised for strong growth in the second half of the year.

Remember that the fall months are typically rocky for the market, but I look for several bright spots as we close out the year. Presidential elections are historically good for stocks and mergers and acquisitions (M&A) activity traditionally picks up in the fourth quarter, with shares rallying with the start of the year. Until then, I will continue to be on the lookout for the best opportunities for our money and I will keep you updated on the latest news that impacts the market.

 

 

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