Sunday, January 30, 2011

Is the Bernanke rally over?

One of the expected outcomes of the U.S. Federal Reserve’s second round of quantitative easing (QE2) was an increased appetite for riskier assets such as equities and commodities. In late August, when Chairman Ben Bernanke mentioned that the Fed would pump additional money into the economy as part of QE2, he also noted, “there are clearly many challenges in communicating and conducting monetary policy in a low-inflation environment, including the uncertainties associated with the use of nonconventional policy tools”. Since that time, the S&P 500 is up 22.3%, the MSCI World index is up 20.5%, the Russell 2000 index is up 28.5% and the Dow Jones- UBS Commodity index is up 20.5%.

MY TAKE: As expected, QE2 has driven strong performance in many global equity and commodity markets. Going forward, the critical issue is whether this economic stimulus will continue to drive corporate profits and result in positive job creation. Additionally, while concerns about Eurozone sovereign debt and U.S. local and state government budget issues seems muted for now, these issues remain unresolved. The free-ride is likely over and investors should increasingly focus on the risks associated with their positions.

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