The key to watch is employment. That’s part of the Fed’s dual mandate, and the part that Congress is most interested in. The unemployment rate is currently at 7.9%, and that’s not counting the folks who have stopped looking for work. I’d say that the jobless rate would have to fall to 7% before they entertained the idea of cutting back on Quantitative Easing. Not ending it, mind you, but just trimming its sails. For now, the Fed is on the side of higher stock prices.
What Would Reduced QE Mean for Investors?
Let’s look ahead and talk about what will happen when the Fed finally takes away the punchbowl. The biggest impact would be in the gold market, and we got a preview of that last week. A drop in gold makes sense because we’re talking about higher real interest rates. The higher interest rates go above inflation, the worse it is for gold.
Interest rates have been close to or below inflation for years, and that’s been great for gold. However, the yellow metal hasn’t made a new high in nearly 18 months. Gold is down more than $200 an ounce since October, and it recently fell for five days in a row, including a $40 plunge on Wednesday. Like I said, it’s going to be a while before the Fed starts raising interest rates, but once it does, it won’t be pretty for gold.
Reduced QE would also be a big negative for cyclical stocks. The Morgan Stanley Cyclical Index (NYSE:CYC) did much worse than the rest of the market on Wednesday. The CYC has now trailed the market for four days in a row. The Homebuilder ETF (NYSE:XHB), a classic cyclical sector, dropped more than 4.4% on Wednesday.
On our Buy List, cyclicals like Ford (NYSE:F) got smacked around. Shares of Ford are now down to $12.39, which, I should add, is an excellent deal. Ford currently yields 3.2%, which is roughly 3.2% more than Bernanke.
Another victim of the Fed’s minutes was obviously low volatility. On Tuesday, the Volatility Index (NYSE:VIX) reached a six-year intra-day low. From Tuesday’s close to Thursday’s close, the VIX jumped more than 23%. Not bad for two days’ work. Of course, this is an increase from very, very low to very low. Interestingly, the folks in the futures pits aren’t convinced that volatility is on its way back. I think they’re right. QE will be around for a while, and so will low volatility.