Elections and QE2: Will it Make a Difference?
Allianz Global Investors
Scott Migliori
November 5, 2010
Two of the most highly anticipated, over-analyzed and potentially market-moving events of the year have come and gone in the last 24 hours and the initial U.S. equity market reaction can best be described as… "Yawn." Why? Well, both of these events, the outcome of the mid-term election as well as renewed quantitative easing from the Fed, came in much as anticipated and their immediate impact had thus already been discounted by the market. In the case of the midterm elections, the Republican Party gained control of the House of Representatives by capturing at least 60 seats in the House, while also narrowing the Democratic majority in the Senate by gaining six seats in that body as well. In the case of quantitative easing, the Fed announced its intention to purchase $600 billion of Treasuries though June 2011, modestly exceeding the $500 billion most expected but stretching those purchases out over a longer time frame than expected. Net–net, neither of these outcomes came as much of a surprise to the markets.
Looking past the immediate market reaction, the more interesting question is what impact today's events will have on the U.S. economy and equity market over the next six to 12 months. In that regard, we are cautiously optimistic. From an economic perspective, Republican control of the House likely means anti-business rhetoric out of Congress will diminish, which could result in improved business confidence and an uptick in hiring. From an equity market perspective, a perceived mitigation in government intervention has typically been received favorably by the markets, and could especially benefit investor sentiment in areas that had previously received the greatest amount of government scrutiny, for example healthcare and financial services.
The long term impact of the Fed's actions is tougher to calibrate. If successful, renewed quantitative easing could increase both consumer and business confidence and result in better than forecast nominal GDP in 2011. However, without an uptick in these confidence measures, the Fed's actions could result instead in increased capital flows into more speculative areas of the market, especially in the commodity area, which has typically benefited from loose monetary policy. In this regard, the price of oil is probably the most critical one to watch as a significant uptick in gasoline prices will act as a tax on the consumer and would likely derail the very recovery the Fed is trying to stimulate. We will be watching consumer and business confidence measures as well as commodity price trends closely over the coming months to gauge the effectiveness of the Fed's efforts.
Past performance is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts are inherently limited and should not be relied upon as an indicator of future results.
A Word about Risk: Equity portfolios are subject to the basic stock market risk that a particular security or securities in general, may decrease in value. Concentrating investments in individual sectors may add additional risk and additional volatility compared to a diversified equity portfolio. Commodity investments may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments and may not be suitable for all investors.
Gross Domestic Product (GDP) is the value of all final goods and services produced in a specific country. It is the broadest measure of economic activity and the principal indicator of economic performance.
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