Ask the market, poll the economists, read the sheep entrails — it looks like we’re getting a third round of bond purchases, known as quantitative easing, out of the Federal Reserve Thursday.
Oddsmakers say Ben Bernanke & Co. are also likely to extend the Fed’s pledge to keep short-term rates at zero through the end of 2015.
Both actions — bond buying on the long end and jawboning on the short end — should keep the yield curve flat and low. True, ultra-low rates have failed to ignite GDP three years into the worst recovery since the Great Depression, but what’s a central banker to do?
The thing is, whether we get QE3 or not, we’re almost certainly headed for a return of choppy, volatile trading, strategists say.
Expectations of more QE, the European Central Bank’s own bond-buying program (which was green-lighted by the German high court Wednesday), and more stimulus spending from China (on giant infrastructure projects) all look to be priced into the market, and then some.
The S&P 500 is up nearly 13% from its May 31 low. About half of that has come just since late July, when ECB President Mario Draghi pledged to save the euro. The ECB follow-up plan and German court approval have since only added to the market’s euphoria.
So much for sell the news.
But plenty of fundamental hurdles, economic anxiety and political uncertainty are still strewn in the bulls’ path.
With third-quarter earnings set to go negative, slower global growth, the November election and looming “fiscal cliff,” don’t be surprised it we hit a volatile, muddle-through, grind-higher trading pattern ahead.
“We still believe there is further upside potential for stocks and other risk assets, but given all of the uncertainty, we expect the rest of the year will see some heightened levels of volatility as investors remain quite nervous about the number of downside risks,” Bob Doll, market strategist at BlackRock (NYSE:BLK), says in this week’s note to clients.
More worrisome is Jeff Saut’s take on upcoming market moves. The Raymond James (NYSE:RJF) investment strategist has a strong track record timing the market’s trajectory, and his charts are flashing peak and pullback very soon.
“The election year cycle suggests a ‘high’ is due this month with a pullback into mid/late-October that sinks the footings for the year-end rally,” Saut writes in this week’s note to clients. “The catalyst for a decline should surface this week out of either the Fed meeting or the German constitutional court meeting. In any event, a near-term trading top is due.”
And, make no mistake, the election is huge, because nothing is getting done on avoiding the fiscal cliff until the race for the White House is settled. As InvestorPlace contributor Jonathan Berr says: “The stakes couldn’t be higher. The U.S. has to decide whether it wants to go down the path of austerity that has brought Europe to its knees or find a way to sensibly encourage economic growth while maintaining fiscal discipline.”
Perhaps the best take on the relative importance of QE 3 versus the fiscal cliff comes from LPL Financial (NASDAQ:LPLA) chief market strategist Jeff Kleintop.
Yes, the Fed is likely to launch QE3, Kleintop opines, but if we go over the fiscal cliff, it’ll be “like getting a flu shot before storming the beach at Normandy.”
As of this writing, Dan Burrows held no positions in any of the aforementioned securities.