Does The End of QE2 Spell Doom For The Stock Market?

| May 27, 2011 | 0 Comments

Penny StocksJune is almost here.  And with it comes the official end to QE2.  Word is the Fed plans to end their well publicized bond buying program sometime next month.

So what’s that mean to investors?

I’ll explain in a moment, but first, a quick recap…

QE2 was implemented by the Fed to inject money into the economy.  In a nutshell, large sums of money were given to the major banks… who were then supposed to make a bunch of loans.  These new loans were meant to increase overall money flow to the public.

In theory, it would mean more home sales and more new businesses… and eventually more jobs.

Of course, things didn’t exactly play out as the Fed planned.

Banks couldn’t be bothered to make loans to the people who really needed them… the average Joe.  Middle class home buyers and small business owners didn’t see a dime.

You know who got the extra cash?  Hedge funds.

And these funds, now flush with cash, poured the money back into the financial markets.  Commodities, equities, and real estate saw a flood of institutional capital.  What’s more, the glut of cash distributed by the Fed caused the dollar to plunge in value.

However, despite the drop in the dollar and a dearth of new loans, QE2 did achieve some of its desired impact.

You see, because of the Fed’s backing, investors felt it was safe again to invest in riskier financial markets.  Investor psychology needed a boost after the Financial Crisis of 2008… and QE2 provided the security blanket investors desired.

So now, with QE2 ending, what’s going to happen?

The specter of a QE-less US economy seems to have some people worried.  The stock market has taken a hit in recent weeks.  And commodities have suffered a decent sized pullback.

However, the dollar has strengthened noticeably over the same period… so it’s not all bad.

Here’s the thing…

I don’t think the end of QE2 matters all that much… at least for stocks.


Because what really drives stocks higher are solid earnings.

Don’t get me wrong, the strength of the dollar is important.  The employment situation even more so.  But, at the end of the day, people will buy stocks if companies post strong earnings.

So keep a close watch on earnings this season… and you’ll know if the stock market is the place to be.  And if earnings look strong, don’t hesitate to jump in.  QE2 may have seemed like a big deal to the financial markets, but really, it’s all about the bottom line.

Yours in profit,

Gordon Lewis

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