Hi there, welcome back!
The market received a major boost last week with QE infinite (QE3) from the Fed. This will boost liquidity and support the slow but recovering property market in the US, which in turn will generate investment and consumption to enable the US economy to continue growing and generate employment, albeit slowly. Given the historically low yield elsewhere, stocks are positioned to rise. As such, I am going to dedicate today's posting on this important QE and resuming my discussion on sector rotation two weeks later.
I am sharing below a chart of the SP500 and how it responded to the past two rounds of QE.
From the chart above, you will observe that:
1. Following each QE, market rebounded or continued higher.
2. With the ending of each QE, market retreated.
3. Despite each time market pulling back on termination of QE, the SP500 has put in higher lows and higher highs. The market has remained on an uptrend, a positive sign.
4. Expectations on US and global economic fundamentals, corporate earnings performance, market valuation and next course of Fed actions have impacted on duration of market rally following each quantitative easing.
5. Following the current QE Infinite (or QE3), market may retest 1380 before heading higher, and likely posting new high soon. The indefinite buying of mortgage securities will continue to inject liquidity into the market keeping interest rates low. Historically, when earnings yield differential between stocks and treasuries is positive and high, ie. over 3% (like they are now), this makes a very compelling case to invest in stocks.
6. Within the equity asset class, the following may happen:
a. Consumer Discretionary stocks will benefit from low interest rates
b. Basic materials and Energy stocks will benefit but these stocks are also likely dependent on inflationary expectations and China growth
c. Gold stocks and gold miners will benefit from hedging against depreciating fiat currencies and inflation.
d. Financial instituations may benefit from lower borrowing cost and improved margins but have to bear in mind how the yield curve is shifting and headwinds in this industry.
e. Industrial stocks will benefit but beware if global recovery is slow, these stocks may tank soon if they become over-extended too quickly.
f. Technology stocks likely to rise, as innovation remains a bedrock to the US economy and growth likely to rise, justifying higher stock prices.
g. Biotechnology stocks will continue to rise as long as high growth story is intact.
h. REITS and high dividend paying stocks will be in favour given their high yeid.
i. Construction sector should continue to perform well as US property sector recovers.
j. Global companies with large international footprint will benefit as USD declines.
h. Stocks in healthcare, consumer staples and utilities may get lifted but as I have written in my earlier posts, these defensive stocks are likely to be laggard sectors as market takes on another leg higher.
So ride on the right side of the wave, and good sector and stock selection will improve odds in your favour.
Stay tuned!
