While central banks are distorting the current market, there’s no easy solution in simply following the Fed.
The problem is two-fold. First, there are theoretical relationships that describe how various asset classes are likely to perform in a liquidity-flooded market… but they’re just that, theoretical. In reality, you don’t always see the expected relationship hold up.
The other problem with jumping on Fed-driven bandwagons is that further easing was widely anticipated. This led many investors to “buy the rumor and sell the news.” Meaning, gold bugs ran up the price of gold well before the September 13 announcement, leaving slimmer gains after QE3.
Let’s take a look at a few asset classes and how they’ve held up AFTER the QE3 announcement – we’ll call it “post-party hangover performance:”
As you can see, several of the post-QE3-announcement returns run against theory.
Stimulus is typically expected to prop up commodity prices, yet both the commodity index and oil lost ground after September 13. Gold is generally viewed as the biggest winner during money printing sprees, yet it’s up just a hair.
On the other side of the coin, excessive money printing ususally spells trouble for bonds and the dollar. Yet these two have held up the best from September 14 to present.
We’re only looking at a two-week period, so it’s too early to fully gauge the market’s reaction to QE3. That said, it appears the market saw this coming for months… then yawned when it arrived.
We’ll see if these trends continue over the next few months, especially once the U.S. election is decided… and investors stop holding their breath.
If you haven’t done so already read the Survive & Prosper issue on “Central Banks Dominate the Investment World”