The market is running on the hopes of QE3 being released by The Fed. Let's have a look at five asset classes in the hopes of gaining some perspective into movements of those markets. I want to look at the prior QE1 and QE2 time periods and see how the markets reacted prior and after the announcement. The five asset class ETFs are S&P 500 (SPY), Copper (JJC), Soft Commodities (JJG) ETN, and I am including oil ($WTIC) as the fourth and Gold (GLD) as number five. From here we can make an argument whether QE3 will even be a consideration and if so, what can we expect from the markets based on two prior QE releases.
|QE1||YTD Prior||During QE1|
|QE2||YTD Prior||During QE2|
From the above chart. It is easy to see why QE1 was released, as all five asset classes were down significantly for the year in a deflationary setting, with oil at 45 / barrel. QE2 was released as all five asset classes were in positive territory for the year, and oil at 85 / barrel. Double digit gains were seen across all except the soft commodity ETN JJG, which saw a -5% fall during QE2.
So from QE1 (during) to QE2 (during), the effect was somewhat muted, mainly because all five were already in positive territory year-to-date heading into the QE2 announcement.
Let's look at the present state of the five asset classes to see how they fare year-to-date below.
|QE3 ?||YTD Current||During QE3|
Here is a 2012 year-to-date chart of the five asset classes. (click to enlarge)
Notice, that from the chart above JJG, the ETN that tracks soy beans, corn and wheat, has recently made a parabolic move higher and is up 43% for the year. This is just the action that The Fed does not want to see with a potential QE3 announcement. Oil at 91.00 / barrel does not bode well for QE3 either.
Bottom Line: Front running a QE3 announcement can be a risky bet. QE1 made perfect sense, as all asset classes measured were in a deflationary spiral. QE2 did have the effect of raising asset prices double digit after the announcement, but it was overall a muted response. The potential for QE3 to be announced anytime soon looks rather slim, based on food commodities soaring, and oil at 91.00 a barrel. High food commodities are likely to set off another bout of rioting in the Middle East and emerging markets. I do not believe The Fed would want that heading into an election year. We would have to see a market correction to the tune of 10-15%, with soft commodities and oil selling off, before I would expect any QE3 announcement. Portfolios are presently 100% cash.