Will Bernanke Be The Global Economy’s Savior?

Bazooka Ben goes all in and says “QE forever!”

Not exactly “forever,” maybe, but at least for as far as they eye can see as the Federal Reserve launches a new, open ended program of quantitative easing.  Markets rallied sharply across all asset classes in response and so now markets appear ready to go much higher as they ride the horses of easy money and the “Bernanke Put.”

On My ETF Radar

NYSEARCA:SPY

In the chart above, we can see how the S&P 500 (NYSEARCA:SPY) broke higher last week, now leaving all resistance behind as it reached multi-year highs.  It went to a “buy” signal with the ascending triple top breakout on August 7th and still has a near term price objective of 1550, approximately 7% above Friday’s close.

Economic View From the Summit

Major U.S. stocks indexes rallied hard for the week, the dollar fell and Treasury bonds slipped as markets digested Dr. Bernanke’s plans for more quantitative easing ahead.

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Major indexes are up roughly 4% over the last two weeks and closed higher for the week on excitement over renewed support from the Fed.

For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) added 2.2%, the S&P 500 (NYSEARCA:SPY) climbed 1.9%, the Nasdaq Composite (NYSEARCA:QQQ) jumped 1.5% and the Russell 200 (NYSEARCA:IWM) rose 2.5%.

The S&P 500 (NYSEARCA:SPY) is now back to weekly closing levels last seen in December, 2007, and the Nasdaq (NYSEARCA:QQQ) is now at its highest closing level since late 2000.

Gold (NYSEARCA:GLD) rose to $1773, up approximately 9% from mid August on the outlook for more monetary easing, a weaker dollar and higher commodity prices ahead.

Economic reports were mixed with September University of Michigan consumer confidence risking, along with the National Federation of Independent Businesses report, and August retail sales rose and modestly beat expectations.  On the negative side, when auto sales were stripped out of retail sales, the number was flat.  Unemployment claims rose to 382,000 from last week’s 367,000, missing expectations, and August Industrial Production declined -1.2%, down from +0.5% last month.

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Next week’s economic reports bring the Empire State Index on Monday, home builders on Tuesday, housing starts and existing home sales on Wednesday and Thursday is the heaviest data day with weekly unemployment, flash PMI and the Philadelphia Fed report.

Saturday, September 15th, marked the 4th anniversary of the Lehman Brothers bankruptcy which was one of the key triggers leading to the financial crisis and bear market of 2008.  Lehman  filed for bankruptcy shortly after 1:00 a.m. Eastern time to become the largest bankruptcy in U.S. history, and the Dow Jones Industrial Average (NYSEARCA:DIA) dropped roughly 500 points that day.  The fall of Lehman marked the start of a period of intense volatility that saw the Dow Jones Industrial Average (NYSEARCA:DIA) fall to as low as 6626 in March, 2009, as the “Great Recession” took  hold across the world.

Today we’re still coping with the fallout of September 15, 2008, as unemployment remains at extreme highs, the U.S. recovery limps along and the Federal Reserve is still applying massive amounts of first aid to our injured economy.

Dr. Bernanke’s aggressive move near the 4th anniversary of Lehman Brothers can only be seen as something of an ominous omen long term, in spite of the current rally, in that things must still  be bad and the road ahead still treacherous for him and his colleagues to take this kind of aggressive action.  The effect and outcome of this move are being hotly debated in financial circles and no one knows what those might be over the long term as we have never been here before.

However, there’s no doubt that equities like quantitative easing.  QE1 triggered a more than 70% gain in the S&P 500 (NYSEARCA) between March, 2009, and March, 2010.  When Dr. Bernanke hinted about QE2 at Jackson Hole in August two years ago, the S&P 500 (NYSEARCA:SPY) started a climb that totaled more than 20% through the program’s completion in June, 2011.  This year, the S&P 500 (NYSEARCA:SPY) started moving off its lows of late June and is up 14% from the June 1st low and up 7% since early August, leaving it up 14% year to date.

Bottom line: The question now, of course, is how much is left, particularly with the global economy slowing, the approaching fiscal cliff, a Presidential election and potential escalating difficulties in the Middle East.  If QE3 runs the same course as QE2, we can expect double digit gains ahead for U.S. stock markets unless one of these nasty factors knocks QE3 off course.  On the other hand, what makes QE3 different, and potentially much more powerful, is its unlimited nature and that it comes in concert with aggressive action by the European Central Bank.  Where and how this ends in the long term is a complete unknown. Will it lead to recovery or a monstrous asset bubble and potential global financial collapse?  These questions will be hotly argued in the weeks ahead and one day we’ll know the answer.  However, for today, Bazooka Ben has gone all in, and the old cliche, “don’t fight the Fed,” seems more prudent than ever.

Disclosure: The ETF Premium Newsletter holds a position in (NYSEARCA:IWM) actively trades a wide range of exchange traded funds and positions can change at any time.

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John Nyaradi is the author of The ETF Investing Premium Newsletter.