Are stocks headed to all-time highs?
Thursday's Fed decision has sent risky assets flying on a wave of cheap-money optimism. Will it be enough to send stocks over their 2007 highs?
Stocks, commodities and other risky assets blasted higher in reaction to the Federal Reserve's unveiling of what the market has already dubbed QE3. But it is, in reality, different from and far more aggressive than the previous stimulus efforts seen in late 2008 (QE1), late 2010 (QE2) and late 2011 (Operation Twist). The new effort, which will target mortgage securities, is unlimited in that it has a set target of $40 billion a month in purchases but no set end date.
The program will continue -- and could be expanded -- until the job market improves "substantially." Combined with its already extended Operation Twist initiative, the Fed will now be pumping $85 billion a month into the economy through the end of the year -- similar to the pace of monetary injection seen during the $600 billion QE2 program. And if the Fed continues until the unemployment rate falls to 7% -- which may not happen until 2015 -- the purchases could result in $1.4 trillion worth of new stimulus.
Investors reacted positively to the news, boosting the "risk on" trade as economic growth and inflation expectations surged higher. In fact, the Dow Jones Industrial Average is now closing in its 2007 peak with enough velocity and cheap-money accelerant to possibly push to new all-time highs.
Consider this: Investor sentiment has been dour and money has been coming out of stocks and moving into bonds over the last few months. Now, a reversal is upon us, with capital rotating into cyclical, economically-sensitive stocks and small cap issues. This rotation has just started. And it's likely to continue.
Why? The Fed's actions are boosting economic growth expectations and inflation expectations. Both are positives for stocks and negatives for bonds.
There will be plenty to say about the Fed's actions in the days and weeks to come. But for now, know that it will be a near-term positive for the housing and stock market (boosting both is a stated goal of Fed chairman Bernanke). And that should help boost consumer confidence since both areas are very important for net household wealth.
There is also the chance that inflation overshoots to the upside.
With monetary stimulus both here and overseas revving up, the situation is vulnerable to food and energy supply shocks that could whip up inflation. A pre-election Israeli attack on Iranian nuclear facilities is my main worry since it would cause crude oil to spike, undermine the consumer confidence boost of QE3, and neutralize any benefit of additional monetary policy stimulus.
This is what happened during QE2 in the middle of 2011 as a result of the Arab Spring protests.
Producer price inflation is already inching higher. The Producer Price Index increased at its highest monthly rate in three years in August. The 1.7% gain came on much firmer food and energy prices. Food inflation rose by 0.9% and energy spiked by 6.4%, which included a 13.6% rise in gas prices, itself the largest gain in three years.
The Dow is just 425 points from 14,000. I think it will get there soon, encouraging fresh buyers to jump into a fast rising market as greed overrides fear.
As a result, I'm recommending my newsletter clients and readers harvest profits from existing precious metals positions and rotate the capital into new areas of strength including industrial and emerging market stocks. As a result, I'm adding Caterpillar (CAT) to my Edge Letter Sample Portfolio.
Disclosure: Anthony has recommended CAT, AG, USLV, and GDXJ to his newsletter subscribers.
I found CAT with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)
Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at firstname.lastname@example.org and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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Career politicians have become a virus slowly destroying the economic life of the country. Since some very significant laws and programs that apply to the common citizen do not apply to the American Royalty in the legislative branch perhaps it is time for term limits. We can impose them...don't vote for the incumbent.
Till the bottom falls out SOON!
Bernanke and OBama make the prices of oil go up so food and oil and everything goes unbuyable and then plants close and lay offs are an everyday thing. THIS MAKES THE ECONOMY BETTER? Good thinking Obama and Bernanke. Not the brightest bulbs in the box.
Higher prices for all goods will not increase demand and will not create jobs. This is a kick in the
balls for Main St. and a gift for Wall St. pigs.
I think there may be a "fiscal cliff" bear market coming soon, but it probably won't last long and likely won't be extremely steep either - that is, if this Congress can work together for ONCE.
Hopefully CONgress will get its act together soon!
Surprisingly VL....You seemed to feel if anyone points out any faults in your logic,ideas or statements; They are nothing but a condescending voice in the forest of lost souls...
Your over usage of the explanation towards your peers, seems condescending in it's own right.?
When such a poster as Mavre offers their own veiwpoint as a differing opinion, or points out some fallacies in your's;....They are the one "supplying a load of pickle juice."
I find quite often that an opposing veiwpoint is somewhat "refreshing and illuminating" and refutes the droning of others; That may be constantly beating on the same drum...
You may check with spellcheck, if you feel it is necessary.
"The Treasury prints money - NOT the Federal Reserve. Banks are not lending because they reap a greater return by using capital to invest in derivatives and currency trading. Lending out money only produces minimal returns due to the low interest rate environment, so you only allocate capital that is a "sure thing" to be paid back - ie. very low risk of default in order to earn a low rate of return.
Replace the Federal Reserve with WHAT?!? A private National Bank? HA! Another Government Agency? Double HA!"
I never said the Fed prints the money. It establishes the quantity of currency by selling bonds We the People are indebted to repay. When Hank Paulsen was Secretary of Treasury (former CEO of Goldman Sachs) and insisted in TARP, he was telling Congress to authorize indebtedness for the People whose contracts would, because they could, be purchased by Goldman Sachs using cash borrowed from the Fed at the ridiculously low Bank Rate. When Nixon took us off the Gold Standard in 1973, Founders still ran many American corporations, we manufactured the best quality and the workforce was paid a fair wage. When you say the Dollar remains the same value as did in 2002, you forget to consider that- we import everything, we make very little and none of it necessities. Big business sold the factories and trade secrets, exported jobs and terminated the workforce. There's no comparing now to any time in America's past. Stocks are at record highs without ANY substantiation. Look out your window, sir. The WHOLE WORLD is frustrated with money grubbers and many nations are rising up in protest. There is no longer a separation between politics and finance, due mainly to the Gramm Leach Bliley Act. Your post was condescending not illuminating. Where do you run to once you've screwed the whole world?
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[BRIEFING.COM] The major averages posted solid gains ahead of tomorrow's policy directive from the Federal Open Market Committee. The S&P 500 rallied 0.8%, while the Russell 2000 (+0.3%) could not keep pace with the benchmark index.
Equity indices hovered near their flat lines during the first two hours of action, but surged in reaction to reports from the Wall Street Journal concerning tomorrow's FOMC statement. Specifically, Fed watcher Jon Hilsenrath indicated that the statement ... More
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