Dynamic Wealth Report | Monday, September 10, 2012
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Economists Do About Face - Say QE3 Coming This Week!
By Robert Morris
 In my article from two weeks ago, Will He Or Won't He?, I discussed the odds of Fed Chairman Ben Bernanke announcing a new round of quantitative easing at the Jackson Hole, Wyoming conference. And as I expected, Mr. Bernanke held off on making any such grand pronouncement.
Instead, the beleaguered Fed Chairman used the speaking opportunity to make his case for a third round of the controversial monetary policy.
He pointed out that the last two rounds of QE boosted stock prices, improved financial markets, and helped add over two million jobs to the US economy. He also explained why the potential benefits of the strategy still outweigh any potential risks.
Here's a telling snippet from the speech...
"The odds are strong that the Fed's asset purchases will make money for the taxpayers, reducing the federal deficit and debt... And, of course, to the extent that monetary policy helps strengthen the economy and raise incomes, the benefits for the U.S. fiscal position would be substantial." In addition, Mr. Bernanke made it clear the Fed is poised to unleash QE3 sooner rather than later. Any doubts about the Fed's willingness to pull the trigger were quickly put to rest by the following statement...
"The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions." Investors certainly interpreted the Fed Chairman's words as signaling QE3 is right around the corner. Since the speech aired, they've sent the S&P 500 Index climbing more than 2.7%.
What's more, the key measure of US stock prices ended trading on Friday at 1,437.92 - the highest closing value since January 3, 2008.
So now the big question on everyone's minds is whether the Fed will announce QE3 later this week. Bernanke is scheduled to speak on Thursday, September 13th after a two-day FOMC meeting.
And after Friday's disappointing jobs report, many believe it's a done deal.
The US economy added just 96,000 workers in August, far below economists' expectations for 130,000 new jobs. And although the unemployment rate fell from 8.3% to 8.1%, the drop was due to a large number of unemployed giving up their job searches.
There's no doubt the Fed must act soon to boost employment levels.
According to Bloomberg, the unemployment rate has now topped 8% since February 2009. And it's the longest period of 8%-plus unemployment since the government began keeping track in 1948.
Of course, the longer we go without getting people back to work, the greater the risk our fragile economic recovery will falter.
In fact, growth is already slowing.
In the second quarter of 2012, GDP grew at an annualized rate of just 1.7%. That's down from 2.0% in the first quarter, and is well below the 3.2% average growth rate since 1950.
Given these scary figures, it's no surprise that many Fed watchers have changed their minds and are betting the Fed will announce QE3 this week.
After stronger than expected economic data came out in mid-August, most experts believed the Fed would wait until after the November election to take action. But with the shockingly bad August jobs report now in hand, a good number are changing their tune.
For example, CNBC reports Goldman Sachs economist Jan Hatzius believes the odds of QE3 coming this week are now better than 50%. And after the jobs report came out, Chief Economist at Mesirow Financial, Diane Swonk told CNBC... "This is it."
So if the Fed does indeed announce QE3 this week, how will it affect the stock market?
It's hard to say...
The S&P 500 has already gained more than 14% so far this year. And the benchmark index is now less than 10% from its all-time record high.
What's more, Bloomberg reports the S&P is now trading at 13.9x expected earnings, which is the highest multiple since February 2011, and is almost equal to the average ratio since 2007 of 14x.
However, at least one prominent stock market maven believes the S&P will move significantly higher from current levels.
In a note to clients, Citigroup Equity Strategist, Tobias Levkovich, said he sees the S&P 500 ending 2013 at 1,615. That's a solid 12.3% above Friday's closing value of 1,437.92.
Mr. Levkovich admitted that setting a 2013 price target may be a bit premature, but said he has good reasons to back it up. In the report, he explained...
"Attractive valuations, credit dynamics and implied earnings growth all support market appreciation even as sentiment is not as constructive." Regardless of what you might believe about the market's direction from here, there's no question we're in for an exciting week. Keep a close eye on what happens... and be prepared to take profits or add to positions depending on how events play out.
Profitably Yours,
Robert Morris
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