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I went to the University of Washington in the 1970s and lived on the same dorm floor as several of the players on the football team. I was expecting a bunch of thick, muscle-bound gridiron heroes. But, shockingly, many of them were thin without much muscle at all.
Fast forward a couple years, and all those skinny freshmen morphed into massive, ultra-muscular juniors and seniors. And no, that massive increase in girth and strength wasn’t solely from spending time in the weight room.
One of them flat out told me they were using steroids.
No question; the long-term use of steroids is dangerous. But the short-time gains can be enormous. And I think the same can be true in the market.
The Federal Reserve just announced its own version of steroids last week. And I expect the effect on the stock market is going to rival the gains those skinny freshmen football players enjoyed.
Way back in September 2012, the Fed announced its third round of quantitative easing — or QE3 — with a pledge to buy $40 billion of Treasury bonds and mortgage-backed securities per month.
Those monetary steroids set the stock market on fire. In 2013, the S&P 500 was up over 32%. And by 2014, it was up another 13.7%.
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Plain and simple; steroids — hormone or financial — work.
The Fed has pledged to spend $60 billion a month on Treasury securities. That’s $20 billion a month — or 50% — bigger than QE3.
Disingenuously, the Fed refuses to call this $60 billion buying spree a new round of quantitative easing. Federal Reserve Chairman Jerome Powell said the $60 billion monthly buying binge “should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis.”
I was raised on a farm. We had vulgar term for cow manure, and that is exactly what is coming out of Powell’s mouth now.
This is QE4, and the effect on the stock market is going to be the same as QE3.
In fact, I attribute last week’s big triple-digit gains more to this new QE4 than the announced potential resolution of the Chinese trade war.
Moreover, the Fed has cut interest rates two times in the last year, down to a range of 1.75% to 2%. It’s actively trying to stimulate economic growth.
And it’s widely expected to cut interest rate again this year. Perhaps as soon as the Oct. 29–30 meeting.
Still, whatever the Fed calls these economic injections doesn’t change the effect they’re about to create in the economy.
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Old timers like me will remember Marty Zweig from Wall Street Week. Marty accurately called the 1987 Crash, and he coined the timely phrase, “Don’t fight the Fed.”
And with the Fed putting in all this effort into fostering economic growth, you would be wrong to fight the Fed by fleeing the stock market.
My advice? Buy, don’t run from, this stock market.
Best wishes,
Tony Sagami
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