Will The Fed Rescue Investors Again?

| June 4, 2012 | 0 Comments

The month of May was a brutal one for the stock market.  After hitting a four-year high of 13,338 on May 1st, the Dow Jones Industrials went on a gut-wrenching downward slide.

The Blue Chip index gave up more than 820 points or 6.2% for the month.  It was the Dow’s worst monthly performance in two years.

What happened?

Uncertainty over the ongoing financial crisis in Europe spurred many investors to shift money out of stocks and into US Treasury bonds.

A good number are worried Greece will soon be forced to exit the European Union.  A recent poll showed the far-left Syriza party, which opposes bailouts and steep budget cuts, is gaining support amongst Greek voters.

If Greece is indeed kicked out of the EU, the expulsion would likely push the European economy into a multi-year recession. 

And we’re not talking about a run of the mill economic slowdown either.  According to Fitch Ratings, we could be in store for a recession as deep as the one in 2008-2009.

But that’s not all…

Investors are also beginning to worry the US and Chinese economies aren’t strong enough to prevent the entire global economy from sliding headlong into recession.

On Friday, the latest monthly jobs report showed the US economy is adding jobs at a slower pace.  Only 69,000 jobs were created in May.  And the unemployment rate rose from 8.1% to 8.2%.

To make matters worse, the lackluster jobs data came on the heels of a disappointing GDP number… the US economy grew just 1.9% in the first quarter of 2012.

And while China’s red hot growth helped bolster the global economy in 2010 and 2011, there is growing evidence things will be different this time around.

The most recent manufacturing data show factory output slowed sharply in May.  China’s Purchasing Managers’ Index dropped from 53.3 in April to 50.4 in May.  And the number came in below analysts’ estimates of 51.5, suggesting growth is slowing even faster than previously believed.

But as bad as it sounds, all is not lost…

The rapid deterioration in global economic conditions is boosting the odds for another round of quantitative easing (QE) from the US Federal Reserve.  

On Friday, CNBC asked 60 money managers, economists, and investment strategists what the chances are for QE.  A stunning 58% of responders said they expect the Fed will launch a third round of quantitative easing (QE3) in the next 12 months.

That’s up from just 33% of responders six weeks ago.

What’s even more surprising, a good number of those expecting QE3 believe we won’t have to wait very long for the Fed to act.

42% of them expect the central bank will announce QE3 at their next policy meeting in June.  And another 47% believe the Fed will announce QE3 when they get together in July.

CNBC further reports the experts are expecting the next round of QE to total $451 billion on average.

No question about it, QE3 would be music to investors’ ears.

The measure would help drive down long term interest rates and inject liquidity into the financial system.  Plus, it would go a long way toward restoring investor confidence in the market.

Best of all, QE3 should get stocks moving higher in a hurry.

Remember, the first round of QE sparked a major stock market rally in the second half of 2010.  And QE2 had an identical effect on the market in the second half of 2011.

Profitably Yours,

Robert Morris

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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