Will QE4 Bring Joy to the Market?
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I once asked if Fed Chairman Ben Bernanke was incredibly smart or just stupid. In my opinion, the guy is brilliant. And the way the Fed has navigated our country out of its worse economic situation since the Great Depression is nothing short of remarkable.
Twist of fate or a lemon?
His brilliance alone minimized not only the damage to the U.S. but likely to the world - helped through various programs and and rate cuts. Most recently, in September, the Fed launched “Operation Twist,” a program designed to lower interest rates on corporate bonds and mortgages. Although the market applauded the decision, very few knew how it worked. Or for that matter, did if it worked at all.
The program called for the Fed to buy almost $700 billion in long term treasuries above 6 year durations - equating to approximately $45 billion per month. This takes place while at the same time shorter term securities under 3 year durations would be sold – thus the term “twist.” It’s brilliant in theory.
Its goal was to help keep long term rates lower as away to fuel growth through corporate and consumer spending. But has it worked enough? This continues to be the debate. In many respects it has accomplished its goal. In fact, it has been these types of strategies, known as “monetary stimulus,” that have kept our country's unemployment rate out of double-digits. However, critics proclaim that Bernanke has not done enough.
QE4 or no QE4: There are question to both
Now, with Operation Twist set to expire at the end of this month, the Fed will be holding its last policy meeting of the year (Tuesday and Wednesday) to determine what its next course of action will be. Rumors are that QE4 is on the table, also known as the purchase of mortgage-backed securities.
On the other hand, there are those that say that the November jobs report was so good that the Fed is not likely to go in that direction. However, I don’t see it that way. While it’s true that the rate of unemployment has improved, there are still quite a few people that are either out of work or under-employed.
Likewise, there is a considerable amount of jobseekers that have stopped seeking altogether. How will the market respond? What’s more, whether or not Q4 is a reality, a lot will be taken from the words and assumptions will be made by what the Fed elects to do or not to do. For instance, if Q4 is nixed, that might be perceived as both a good and a bad thing.
How will the market react?
That’s really a tough question to answer. While I want to think that it depends on how the news is delivered, in the end it may not matter. On the other hand, I can’t ignore the favorable reaction of the market when QE3 was announced in September. Investors jumped for joy, while also jumping on individual equities such as Apple (NASDAQ: AAPL) - sending shares soaring to its all time high of $705. This was on essentially no company-specific news.
Although it’s hard to say that Apple’s gains were all stimulus-driven, that it followed a quarter where Apple missed EPS estimates makes it tough to omit the possibility. Likewise, it’s also possible to point to a stock such as Research in Motion (NASDAQ: BBRY) that has seen its shares soar over 60% since during that same period.
Although RIM’s announcement of BB10 serves as a significant catalyst, the new OS was already anticipated for quite some time. In both cases, whether in winners like Apple or downtrodden companies like RIM, investors felt more confident to increase their exposure to risk. It can all be attributed to the Fed’s action. So will QE4 send these shares higher? Investors can only hope. But what would a “yay or nay” mean?
While a “no to QE4” would signal that the Fed believes the economy is not in as worse of a shape to justify more easing, on the other hand, investors will be disappointed – likely punishing the Dow by triple digits. Investors can also expect Apple and RIM to give up their gains. The reason is simple; investors will see it as less of a cash infusion going to their companies.
In other words, investments will be perceived as not getting the fiscal relief needed to spur growth. This will cause the market to look for other places to move their cash – hard assets such as gold immediately becomes in play. Then there’s also oil and real estate to consider. However, regardless of what happens with QE4 or whether or not the Fed lowers interest rates, investors still have to deal with the overhang of Europe and those fiscal concerns as the U.S. still struggles with the autonomy that it needs.
From an investment perspective, it still comes down to fundamentals. Companies will still have to execute. While there are those such as Pandora (NYSE: P) that want to blame their poor performance on to the fiscal cliff and weak economic spending, there are also consistent performers such as Cisco (NASDAQ: CSCO).
For that matter, the fact that Cisco has been able to produce seven consecutive earnings beats during this difficult period is pretty remarkable. It also serves as a reminder of what is possible when companies are able to block out all of the noise and focus solely on execution.
While there are some that continue to argue that the previous 3 rounds of easing have not done enough, weak corporate earnings are not enough of an indicator of effectiveness. The fact is, we don’t truly know the extent of where we would be had the Fed not acted. So without that perspective, it’s hard to say what “enough” really is.
As it stands, the economy is still growing at a respectable rate. I’m not going to be foolish (small f) and say that we should be content. But we are not in the disaster that we were 4 years ago either. We have Bernanke to thank for that. QE4 or no, investors should be singing songs of joy that he’s the guy in charge.
rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!