Jul
1
QE2 Made Stock Investors Money
Opinions vary as to the overall effectiveness of QE2; the second round of treasury buying by the Federal Reserve in an attempt to stimulate the economy. This will not be an article debating such, but I will say that important objectives were both met and missed. The housing and job markets did not rebound as was hoped, however deflation was avoided and consumer spending did experience a measurable increase.
What can not be debated is the effect QE2 had on the stock market. Although the program was not officially announced until the first week of November, stocks reversed their negative trend when the Central Bank hinted that a second round of quantitative easing looked to be in the cards. Mr. Market 2010 had been sluggish; down nearly 5% for the year until Bernanke began talking about a possible initiation of the policy in late August.
From August 27th until the end of QE2 yesterday, the Dow jumped 25.1%. This rally weathered a variety of depressive pressures, including the Japan tragedy, Libya, Greece, Egypt, Ireland, an in the tank housing market, an exploding federal deficit, and an unemployment rate that never dropped below 8.8%. Speaking strictly in terms of Rule #1 investing (politics and other issues aside), QE2 laid the groundwork for some nice wheeling and dealing.
The dip the market experienced through the first two plus quarters allowed for some bargain shopping after the robust rebound of 2009. Conceivably, stockpilers could have found desirable entry points and rode the wave, as many wonderful businesses added far more than 25% during this time. But now that QE2 has concluded and the market looks to close over 12,600, does this mean the party is over? What to do?
Rely on Rule #1 fundamentals, especially the long-term perspective of the philosophy (remember the 10-10 rule) and sticker price. Many wonderful businesses are still trading at 30, 40, and 50% of their intrinsic values, so there appears to be no reason to sell if this is the case with the business you own. And although QE2 served as a catalyst for a market rally, this week’s behavior by investors suggests that its completion will not spark a mass sell-off.