Will Bernanke save our stocks?

Founder and Publisher of the Switzer Report
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Wall Street dropped about 2% over the weekend as the threat of recession in the US looms more likely – though it’s still no certainty. The trigger for negativity was the latest employment report, which showed that no new jobs were created in August, while unemployment stayed at 9.1%.

So, are we waiting for the Fed boss, Ben Bernanke, to issue a third quantitative easing package (QE3) and rescue the US economy, the Dow Jones and ultimately our own S&P/ASX 200?

I guess we would have to say “I hope so”, but a Reuters’ article recently raised doubts over whether another round of monetary stimulation would help.

In the meantime, all eyes will be on President Obama when he outlines his job creation plan this Thursday. He needs one – desperately – because no president has ever been re-elected with unemployment over 7.5%.

But some analysts don’t see Obama being able to come up with anything credible.

What made the latest jobs report worse was that the previous figures for June and July were downgraded by 58,000 jobs. On top of that, September is historically the most volatile month on record and so if you add the August volatility to the bad job numbers, you have to expect a tough month for stocks.

With employment in the dog house, it’s understandable that investors are calling for more quantitative easing.

Recall that QE2 worked a treat for stocks with share prices going up about 30% between August last year and May this year. But the critics say a QE3 will have less bang for its buck compared with QE2, and they could be right. But even so, I still think a QE3 would cause a bounce on the stock market.

If QE2 brought a 30% bounce, I reckon QE3 would bring at least a 10% jump in stock prices. Anyway, let’s take a look at what Reuters is arguing.

They say that the experts believe a sideways or down-tracking in stock prices looks more likely following the August jobs report.

Reuters did offer some positive views, admitting that “many fund managers are still convinced the US economy will avoid a recession and stocks will rally into the end of the year”. That’s still my view too.

The reality is that this Reuters story that suggested that QE3 would lack punch produced no convincing evidence that this would be the case and that’s because no one knows.

I think Bernanke would rather wait to see if the economy can resist the drag into recession before heading down the path of unconventional stimulus once again, but if the bad signs get worst, he will act and stocks will go higher. This is simply because QE3 would likely prevent a return to recession, and it’s concerns about a recession that have driven stocks lower. Any QE3 would also likely stimulate demand, which always helps share prices.

If I was a short-term trader, I would largely get out of stocks for a month or so, buy any big dips and be ready for a market upswing across the last quarter of the year.

For the long-term investor, I think the bigger sell-off days are a chance to buy the stocks you want for at least five to 10 years’ time. However, you must realise that 2012 is bound to be another challenging year. But hold onto your hats because 2013 will be the year that will start a good long rally for stocks.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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