Ever since Fed Chairman Ben Bernanke hinted at the start of QE2 last August, the market has been on a historic tear with only a slight blip due to nuclear fears in post-earthquake Japan. Speculation has been rampant and many stocks that in some cases do not have any business being around have soared. Also, commodities like oil have gone into the stratosphere, causing different types of problems. Well, all this could end in late June.
Juicing Stocks Up
It was Bernanke’s goal to cause the stock market to rise and have riskier assets appreciate in order to give the consumer the feeling of being wealthier so he would open up his wallet and start spending. This would stimulate consumer spending, which was anemic due to a weak economy and horrid job prospects. The goal was accomplished in terms of getting stocks to rise, but it is unclear whether or not the consumer is spending again as a result of this.
The Fed will be meeting on April 26 and investors will be eagerly listening to hints about the end of the QE2 program. There are those who are actually anticipating QE3, but that would be one of the most irresponsible moves in the history of Federal Reserve in my opinion because things have more than stabilized. It is time to let markets take care of themselves.
If you have some big gains in riskier stocks, it might be wise to think about taking some profits in anticipation of the end of QE2. The period in between QE1 and QE2 was not good for stocks and terrible for high-beta names, and this could be a preview of what to expect after June. Investors will be more hesitant to pay up for riskier assets once the artificial support from the Fed is over.
This isn’t to say that I expect a market collapse come July. I do expect volatility to increase because dip buyers will not be so complacent and confident. It will make for some more interesting trading for sure though. The bulls have had it too easy since last August, but the end of QE2 means things are bound to get tougher, and return to normalcy.
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