Daily Gains Letter

The Fed’s Change of Heart: What It Means for Investors

By for Daily Gains Letter |

Fed’s Change of HeartAt 2:00 p.m. on Wednesday, Federal Reserve chairman Ben Bernanke said the central bank would, in the eternal quest for job creation and economic growth, continue to buy $85.0 billion a month in bonds. In other words, its third round of quantitative easing (QE III) is charging ahead unabated.

A few minutes later, The New York Times declared, “In Surprise, Fed Decides Not to Curtail Stimulus Effort.” USA Today proclaimed, “Fed delays taper, surprising markets,” while The Guardian said, “Federal Reserve maintains bond-buying stimulus in surprise move.”

Are economic analysts looking at different data than the rest of us? Back on August 29, I predicted the Federal Reserve wouldn’t begin to taper its quantitative easing until early 2014 at the earliest. That was because all of the economic indicators steering the data dependent on quantitative easing policies were nowhere close to being achieved.

For starters, the Federal Reserve said the unemployment rate “remains elevated.” For the Federal Reserve to begin tapering its QE policy, unemployment would have to fall to 6.5%. In August, the unemployment rate held stubbornly high at 7.3%.

The Federal Reserve also wants the U.S. rate of inflation to rise to two percent; after eight months, it’s stuck at one percent. For the Fed to consider tapering, the rate needs to at least double in just a few months—which isn’t going to happen, especially when you look at stagnant wages. Lastly, a new Federal Reserve chairman will be taking the helm in early 2014; Bernanke isn’t going to want to tarnish his reputation or disrupt the U.S. economy before then.

If the Federal Reserve is as good as their word, the chances for tapering are next to nil. The only thing that isn’t a surprise is how quickly the Dow Jones Industrial Average surged after the Federal Reserve made its remarks—and maybe how quickly the Dow Jones Industrial Average and S&P 500 hit record highs.

Industrial Average Chart
Chart courtesy of www.StockCharts.com

One minute after the Federal Reserve made its announcement, investors sent the Dow Jones up 0.75%; it was up roughly 1.2% an hour later, touching a new high of 15,709.58. At the end of the day, the S&P 500 reported a record closing of 1,725.52, while the Dow Jones also closed at a new record high of 15,676.94.

How did the U.S. dollar fare? Not so well. Immediately following the Federal Reserve announcement, the U.S. dollar shed 1.5%, breaking through its support level of 80.5.

U.S. Dollar Index Chart

What does Wednesday’s announcement from the Federal Reserve mean for investors? With QE III going strong, investors can look at riding the momentum; right now, that means that gold and silver stocks and exchange-traded funds (ETFs) are back in play, like the iShares Silver Trust (NYSEArca/SLV).

Investors who think the U.S. dollar will continue to perform poorly might want to look at ETFs that short the U.S. dollar, like the PowerShares DB US Dollar Index Bearish (NYSEArca/UDN).

With a pullback in quantitative easing off the table for the foreseeable future, the markets are, in spite of weak economic data, wide open for a prolonged run.

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

Tags: , , , , , , , , , ,