What one analyst terms “Quantitative Easing Forever” was announced by the Federal Reserve today. For traders, expect the sugar high to recede as this is an admission that the United States economy is very, very weak. In addition to economic stimulus programs that will continue, a low interest rate environment will be maintained well into 2015.
The effects of quantitative easing have been less and less pronounced in the stock market. In previous Federal Reserve Open Market Committee action, it lowered its target interest rate to zero in December 2008. Quantitative Easing 1 and Quantitative Easing 2 inflated the Federal Reserve balance sheet from around $700 billion in mid-2007 to around $3 trillion now.
It is only going to get bigger. Unlike the first second rounds of quantitative easing, Quantitative Easing 3 has no ending date and few other details. Quantitative Easing 2 lasted from November 2010 through June 2011 and consisted of the Federal Reserve inflation is balance sheet to buy about $700 billion in US Treasury bonds. Like the analyst stated, it is “QE Forever.”
Traders should look to oil stocks that pay dividends as these securities are favored for a variety of factors. Quantitative easing drives up the price of oil as speculators flee fiat currencies. The low interest rate environment puts a premium on dividend paying stocks, which applies to many oil companies. Heavy spending by OPEC Nations has resulted in a target price of $100 a barrel for oil. Growth will eventually return to China, India and other major economies. All these will contribute to oil stocks with healthy dividends being very appealing.
The Australian Dollar and Brazilian Real could return to prominence. Australia needs for China to grown again for its economy to recover. Brazil was popular for the carry trade due to the high interest rates in the country.