Quantitative Easing And How To Invest

| November 3, 2010 | 0 Comments

Today is a big day for the markets and investors everywhere.  What happens this afternoon may very well decide the market trend for months to come.

What’s so important about this afternoon?

At 2:15 PM Eastern Time, the Federal Reserve announces the results of their meeting on interest rates.

It sounds incredibly boring I know…

For most people, listening to a report on interest rates is right up there with watching a 50 yard snail race.

But for investors, this meeting is a must watch event.  The markets often get a big reaction off the news.  In years past, it wasn’t uncommon to see the Dow move by triple digits.

But lately the markets and investors have become bored with the Fed meeting.

The reaction has become subdued in recent months.  The markets aren’t moving like they used to.  I guess that’s what happens when interest rates are at 0% with no end in sight.

But this meeting is different…

The Fed is expected to announce a second round of quantitative easing (QE).  The strategy involves buying Treasuries to put downward pressure on long-term interest rates.  According to the Fed, additional stimulus is needed to help strengthen the economy and get people back to work.

Notice I said they’re expected to announce QE2.

The markets have already priced in QE2 to a certain extent.  How do we know this?  The recent two-month surge in stocks can be credited in large part to another expected round of QE.

But here’s where it gets interesting…

Nobody knows for sure just how much QE the Fed in going to unleash.  Is it billions of U.S. dollars or could it be trillions?  Or maybe they’ll change their minds and not do it at all.

We also don’t know how much QE the markets have already priced in.  Are investors expecting billions or trillions?

We don’t know the answer to these questions… yet.

But when 2:15 rolls around, you can expect things to get a little wild.  Investors will start repositioning their portfolios according to the news.  The market reaction to this Fed meeting should be rather explosive.

So what should you do?

Trying to predict the market reaction to this event is essentially a gamble.  So unless you’re already sitting in stocks from much lower prices, you should be on the sidelines.

But after the news is released, you’ll have an opportunity to get invested.  Here’s what I think may happen…

The Fed is likely to announce QE is indeed coming soon.  They’ll also outline a battle plan to go with it.  Likely the Fed will structure Treasury buying in fixed increments.

A few hundred billion here and a few hundred billion there…

The markets may fall initially on the news due to the “buy the rumor, sell the news” effect.  But as long as the QE plan is significant, buyers should step in and carry the markets higher in coming weeks.

I’m leaning this direction for one reason…

I don’t see “Bubble Ben” backing a policy causing the markets to plunge into the end of the year.  Not delivering on QE may destroy retailers’ hopes of a big Christmas season.  Consumers may pull back significantly on spending.  This would further muddy the already murky economic waters.

Now of course, anything can happen.  That’s why watching the market reaction to this event is so important.

But if history is any guide, the Fed is about to print billions of dollars and drive it into the financial system.

For better or for worse…

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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