Is This the Week for QE3?

09/13/2012 12:15 pm EST

Focus: MARKETS

John Stephenson

President and CEO, Stephenson & Company

Last week, Mario Draghi stayed the execution of the euro, and now this week we wait to see what Federal Reserve Chairman Ben Bernanke has up his sleeve for the US market, observes John Stephenson of Strategic Investor.

All eyes will be on the US Federal Reserve’s policy meeting this Thursday, with the disappointing US non-farm payrolls report for August casting a long shadow over the market. Investors are betting that further quantitative easing (QE) by the Fed lies around the corner, but it’s a very close call as to when it’s announced.

Markets rallied strongly late last week, when European Central Bank President Mario Draghi unveiled his bond-buying proposal involving unlimited purchases of government debt. But for markets to continue their upward trajectory, investors will need to see clear evidence that Bernanke and Company are prepared to unleash a third wave of quantitative easing.

This week will be hectic, with a whole host of important sentiment-shaping events on the docket. On Wednesday, Germany’s Constitutional Court is set to rule on the legality of Europe’s bailout fund...and on the same day, a national election will be held in the Netherlands. If that weren’t enough, there’s a meeting of European Finance Ministers and the latest monetary policy announcement from the Federal Open Market Committee.

Investors had been expecting the Fed to take a wait-and-see approach, given encouraging economic data recently, but last week’s gloomy jobs report has revived hope that the central bank will be forced to stimulate the economy once more. The Fed’s decision on further QE will be helped by updated numbers this week on US industrial production, trade, retail sales, and inflation, plus business inventories and the University of Michigan’s estimate for August consumer confidence.

Also weighing on the market is increasing evidence of a slowdown in China, the world’s second-largest economy. The latest ugly sub-50 readings for China’s twin factory PMIs are the most recent signs of a possible hard landing, after decades of breakneck growth.

Other indicators, such as rail volumes and power demand, are continuing to fall, suggesting that Chinese growth has yet to bottom. Yet despite this spate of discouraging news, investors bid up commodities and resource stocks last week, in the hope of further Chinese stimulus programs.

China’s National Development and Reform Commission (NDRC) recently announced the approval of 60 infrastructure projects, including 25 urban rail transit projects in 19 cities and more than 2,000 km of road construction, in an effort to help spur economic development.

But despite these efforts, China’s industrial output grew at the slowest pace in three years, prompting President Hu Jintao to comment that the economic expansion faces “notable downward pressure,” a signal that officials may need to add further stimulus to the economy.

With China’s efforts at stimulus, the ECB’s bond-buying program easing anxieties over Europe, and with QE on tap in America, commodity investors are likely to have at least a couple more weeks of juicy returns. Gold has moved through its 200-day moving average, hitting its highest price since late February—and is likely to keep moving higher, given the near-universal assumption that Bernanke will ease and that Europe is moving toward monetary expansion.

More conservative investors should continue to overweight solid dividend-paying companies within their portfolios. Despite slowing earnings growth, US companies are set to return a record amount of cash to investors this quarter. After paying out a record $67 billion in dividends in the second quarter, S&P 500 companies are on track to surpass that amount this quarter, according to estimates by S&P Dow Jones Indices.

And while the average dividend yield for the S&P 500 companies is just 2.1%, when share buybacks are figured in the yield is above 4% and likely to go higher this quarter. The health of US corporations has caught the eye of investors, with the S&P 500 rallying by 2% last week to close at its best level since 2008.

With central banks priming the pump, it should be another exciting week ahead for investors.

Read more from Strategic Investor here...

Related Reading:

The Jobs Crisis Deepens Every Day

Traders Ignore Reality Yet Again

Big Bucks in China as Reality Bites

Related Articles on MARKETS