Will QE3 Save The Market?

| July 26, 2012 | 0 Comments

Quantitative EasingThe event-driven market rollercoaster continues to roll on.  There’s so much going in the world right now, it’s hard to figure out what to pay attention to.

We have major companies releasing earnings, domestic economic news, Spanish bond auctions, Greek bailout politics, and Chinese economic data, just to name a few.  However, there are two major items that will impact the market more than anything else.

A European bank rescue plan and QE3.

Euro area leaders have already agreed to a European rescue plan of sorts but the details are still fuzzy.  I’m not going to focus on Europe for now, but it’s important to realize that what happens with the EU can have significant effects on US financial markets.

What I am going to talk about is the Fed’s upcoming stimulus program, or QE3.

At this point, QE3 is nearly a foregone conclusion.  Some 70% of bankers who deal with the Fed directly expect another round of quantitative easing, according to Reuters.

Here’s the thing…

There’s nothing monetary policy can accomplish on its own that will save the economy.  However, stimulus can certainly boost asset prices in the short-term.

And that’s obviously a good thing for stock investors.

You see, the Fed is concerned about the job market.  Unemployment is not decreasing as fast as they hoped.  Moreover, the domestic economy is showing renewed signs of slowing down.

Many Fed officials now feel it’s time to act.  As such, there could be a QE3 announcement as early as next week.

Basically, another round of quantitative easing would likely consist of bond purchases on a large scale.  These bonds may include Treasuries, mortgage backed securities, or possibly some other form of debt.

The goal of the bond buying program is reduce long-term key interest rates.  In that way, the Fed hopes to spark large asset purchases such as homes, automobiles, business equipment, and more.

Based on the available data, the previous QE programs did have some of the desired effect.

And, there’s no doubt the stock market loves QE.

Will QE3 have the same impact on stocks?  Only time will tell.  But for the sake of investors, I certainly hope they give it a shot.

And don’t forget, small caps tend to lead the way higher when investors turn bullish.  So, if QE3 does get announced next week, don’t be afraid to load up on your favorite small caps and penny stocks.

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Gordon Lewis

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