The US Federal Reserve’s open-ended third round of quantitative easing (QE3) pulled US stocks out of their slumber and into a two-day rally, taking indices to new multi-year highs when they closed out the week on Friday.
Repeating the surge that followed the late 2010 launch of QE2 — the Fed’s second quantitative easing, bond-buying program — markets seemed poised to continue rallying in the days ahead on the central bank’s promise of an inflation-less, low-interest rate future for possibly another three years.
However, with corporate profits slumping and the economy still facing headwinds from elsewhere — the Fed actually cut its growth forecast for this year — analysts were not confident the rally would trace the long QE-sparked bull run of last year.
The Fed’s announcement of new stimulus on Thursday gave an immediate kick to trade — even if it had been expected — that was sustained through Friday.
The Dow Jones Industrial Average finished the week up 2.14 percent at 13,593.37, its best finish since December 10, 2007.
The S&P 500 gained 1.94 percent to 1,465.77, while the NASDAQ Composite rose 1.52 percent, ending at 3,183.95.
“While everyone is trying to figure out what QE3 means to the economy, stocks have spoken, and they like it,” Ryan Detrick of Schaeffer’s Investment Research said.
“At the same time, hedge funds have totally dropped the ball and missed most of this rally,” Detrick said.
“There’s a good chance these Johnny-come-latelies could be the fuel for the next surge higher,” he added.
Gains were all around, with energy shares and mining companies linked to gold and silver rising strongly.
Freeport McMoran gained 8.1 percent for the period, Barrick Gold added 5.5 percent, and Newmont Mining rose 10.7 percent.
Banks also benefited. Bank of America led the pack with a 8.5 percent gain for the week to US$9.55 while JPMorgan Chase ended up 5.8 percent.
Despite the launch of its iPhone 5, Apple Inc gained an modest 1.6 percent in the week, to a record close of US$691.28.
Other sector beneficiaries were some retail stocks and homebuilders, which regained favor with investors by the Federal Reserve’s promise of lower mortgage rates for homebuyers.
However, there was not as much confidence in the air about the impact of the new monetary stimulus as there was at the launch of QE2 in November 2010.
“The market impact of QE is not very well understood, in part because each QE round has targeted different assets, has differed in size and has been implemented against a different economic and market backdrop,” Chris Low of FTN Financial said.
“And, perhaps most important, investor reactions have evolved as people start to anticipate what happened over the course of each QE round in the past,” Low said.
Analysts said they will still be watching data releases closely for signs of life in the economy.
The week ahead will see the release of the Fed’s New York regional industrial indicator, the Empire Manufacturing Index on Monday; and fresh data on housing starts and home sales on Wednesday.
While strengthening since early this year, economists at Wells Fargo said worries about the political stalemate over fiscal spending are starting to impact the housing sector.
“The housing recovery appears to have lost some steam in recent weeks, as buyers and lenders have grown skittish at the prospect of the approaching fiscal cliff,” they said in a research report on Friday.