QE3: What happens now?
Q3 earnings will still matter for individual stocks, Brown predicts, but QE3 will not affect the major indexes.
U.S. Federal Reserve Chairman Ben Bernanke delivers remarks about a significant shift in the direction of U.S. monetary policy at the Federal Reserve in Washington September 13, 2012. Brown writes that QE3 looks like a game changer at first blush.
Jonathan Ernst/Reuters
Now everything is different. At first blush, QE3 does indeed look like a game changer.
This is business is not about making calls and sticking with them for the sake of being able to say you were right all along, it is about processing new information that will make a difference and dropping the opinions that have been invalidated. I come to work every day hoping I'll be able to do that. It's easier to write about than to actually do. Is your decision making process flexible? Are you hung up on what "should happen" rather than what is likely to happen?
I think the open-ended nature of this new bond buying program ($40 billion a month, unencumbered and without limit) demands that we acknowledge the new rules of the game:
Q3 earnings will still matter for individual stocks, as they always have, and misses will be punished.
And there will be plenty of misses and negative warnings, just like Q2.
But this will not affect the major averages, paradoxically. They should be be able to weather this as they are driven by large companies with incoming dollar flows into their shares as a result of Bernanke flooding the market with dollars.
Worry less about the "E" for now and more about the "P" - QE3 does wonders for multiple expansion, especially as it makes bond holdings even more unpalatable than they already are - the money has to go somewhere.
The new question is not "bonds or stocks?" It is "which kind of stocks?" We prefer the bigger stocks with bond-like characteristics (lower vol, high rate of returning cash to shareholders). Others will reach for garbage and buy cyclicals hoping for improvement from China. Maybe they will get it, the pain will be severe on an individual stock basis if they do not.
When in doubt, do something other than cash.
Dips can be bought. They will be gifts, specifically headline-driven stuff. Because the Europeans are following the Fed now. So long as China doesn't blow up between now and Christmas, we should have a lot less volatility than previously expected into year-end.
These are the new rules in my way of thinking, unless something changes - in which case my job is to reassess. Again, much easier to write about than to actually be about.