In the market, for every buyer, there is a seller and for every winner, a loser. In September, the Federal Reserve announced a third round of asset purchases, a governmental policy called quantitative easing (QE), is being dubbed QE3 by the market. The first two rounds of quantitative easing were big but QE3 is bigger.
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This time, the Fed committed to buying $40 billion worth of mortgage-backed securities every month. What shocked investors was the pledge to continue to do so until the labor market noticeably improved. Regardless of how long it takes, the government will infuse massive amounts of money into United States markets in order to create jobs and get the economy back on track.
However, the market always has winners and losers. QE3 will help some businesses while others anxiously wait for the program to end. It is too early to gauge the success of QE3 but there are plenty of predictions.
Since the announcement of QE1 in November of 2008, SPDR Gold Shares (ARCA:GLD) are up more than 120% compared with the S&P 500, which is up just over 50% in the same period. Although QE efforts should have had an effect on inflation, QE1 and QE2 had very little. Investors are not so sure about QE3 and that may give metals, like gold, another move to the upside as investors use it as an inflation hedge.
Goldman Sachs (NYSE:GS) lists companies like Lennar (NYSE:LEN), Home Depot (NYSE:HD) and Monsanto (NYSE:MON) as outperformers during that time. Many other equities saw QE-related boosts but Goldman Sachs notes that most were growth stocks with cheap valuations.
CNBC reports that since the launch of QE3, loan-originating banks have increased their margins. Although banks were lending to customers at 3.4%, as of October 1, they were paying 1.85% in interest, down from 2.35% the day before the Fed announced QE3.
The Bond Market
Very little in the bond market is simple but conventional wisdom goes like this: when money floods the market, the market rises - making investors more willing to invest in more risky assets. Often, those assets are equities - making bonds fall out of favor. According to Barons, bonds fell out of favor during QE1 and QE2.
The Housing Market
Reuters reports that some Fed officials are concerned that the flood of liquidity reaching the banks is not finding its way to borrowers. It seems, according to Reuters, that while interest rates have fallen since QE1, qualifying for a loan is still no easy task. That, along with increased loan origination costs, has resulted in only about 40% of new liquidity reaching the market. If the money is not being handed out or applicants do not qualify, the housing market does not receive the boost that Fed policy makers had hoped for.
For consumers refinancing their loans and for businesses that need to borrow, a lower interest rate is good news. For fixed-income investors or those with savings accounts or CDs, the announcement of QE3 is more assurance that finding reasonable yields without taking on more risk will not be possible in the near future. Although yields in corporate bonds and dividend paying stocks like AstraZeneca (NYSE:AZN) is around 6%, the risk that comes with individual equities may be inappropriate.
Savers have the choice of leaving their money in products that do not beat the rate of inflation or employing other strategies that they may not understand, and that could result in significant capital loss if the market was to enter a recession again before interest rates rise.
The Bottom Line
The market is a mix of winners and losers. When one side profits, the other side suffers. QE3 could make winners out of growth companies while leaving conservative investors with the choice of ratcheting up risk or waiting out the low interest rate environment. Since this round of QE looks to be more massive than the two before it, investors and consumers will have to wait and see if it has the desired effect of raising both employment and the sense that the economy is healing.
At the time of writing, Tim Parker owned shares of HD since 2011.