Stimulus Side Effects for Investors

The Fed provides stimulus and investors provide some of their own pushing the broad market indexes to new highs. The move following the FOMC meeting was considered to be one of the more aggressive actions taken by the Fed during the recovery. It does leave me with two primary questions, relative to this action. First, will it do anything different this time? Second, where are the opportunities looking forward from this move by the Fed?

The purchase of $40 billion per month in mortgage-backed securities is an attempt to put downward pressure on interest rates. The first reaction was the yield on Treasury bonds rose near the 3% mark on the thirty-year bond. Not exactly the designed goal, but in fairness, Thursday’s reaction was speculation of what could happen,¬†it will take time for the stimulus work through the system. In the statement by Mr. Bernanke he stated this would remain in place until the job market shows steady improvement. How does this activity provide job stimulus? We will see in time how it plays out. It could continue to help the housing sector which has been doing well since last October. Thus, the answer to the question of will it do anything different this time? If it creates jobs and Bernanke’s desired results then the answer would be yes, but I am not holding my breath on that front.

The opportunities question requires us to look at multiple sectors going forward. The first thing to watch is the shift of risk for investors. The the premise of quantitative easing is for the Fed to buy the bonds and provide cash which will be redirected to other assets. The most likely place is stocks and higher risk bonds. A good example of the anticipation is to look at HYG, iShares High Yield Bond ETF. The shares broke above resistance at the $91.75 mark and pushed higher over the last couple of weeks in anticipation of this move by the Fed. This is one sector to watch going forward.

Treasury bonds will see yields rise short term as the Fed provides the stimulus. TBF, ProShares Short 20+ Year Treasury Bond ETF is a simple was to participate in the downside pressure on the bonds. If the move doesn’t work, and fear returns to the markets the negative side effect to the bonds will be offset. Watch how this plays out longer term, but the short term impact is higher yields.

The dollar will be killed. Look at a chart of UUP in response to the increased talk of stimulus with Europe and the US. The support at $22.75 is in play and may give way to more down side. A weaker dollar is not the desired effect at this point. Oil was up 1% on the Thursday and closed above the $98 resistance mark. This breakout is a negative for the consumer, but it is the side effect of a weaker dollar. Watch all the issues that will arise from a weaker dollar longer term. This bring import inflation back into play, higher oil prices and bigger trade deficits.

Dividend stocks versus fixed income assets like REITs or MLPs are a like rotation of assets. Watch the the dividend ETFs to be the benefactors of the increased money supply. DVY, Dow Jones Select Dividend ETF broke above resistance on Thursday and looks ready to continue the move higher in the current uptrend. Higher risk will taken by investors to gain income needed in retirement.

Natural resources offer opportunities looking forward. The commodities are benefactor of stimulus as seen in oil and precious metals. Natural resources are a benefactor as well. IGE, iSharse Natural Resources Index ETF is a good example of this opportunity. This is a sector to watch as this unfolds.

Inflation protection always is a side effect of stimulus. Thus far it has not really played a role in the recovery, but we have seen enough improvement this could shift going forward. Gold has jumped in anticipation of the stimulus and this time they may be right relative to the impact. GLD,  SPDR Gold Trust ETF broke above $157.50 and is at a seven month high currently. The upside will be volatile, but likely will continue based on the Feds action.

Volatility is a side effect of the stimulus from the Fed. This announcement is a double edged sword. The good relative to keeping interest rates low now and jump starting growth through increased money supply is the positive. The negative comes from the potential increase in volatility as investors shift sentiment and trading activity. The argument over the effectiveness of the move by the Fed will be debated daily. Thus, watch the VIX index and tracking the surrounding opportunities.

The loser in the quantitative stimulus is savers and retirees. This type of stimulus is designed for borrowing to stimulate the economy, and in turn hurts the saver and retired individual looking for yields from traditional “safe” investments. The extension to 2015 on low rates from the Fed is not welcome news for those looking for higher yield on savings. In fact it puts the retired person at risk relative to principle as they have to venture into higher risk assets to generate the needed and desire income levels. This continues to be the worst side effect from the Fed stimulus from my view. Principle preservation is the greatest risk to retirees.

There is plenty to consider in relation to the Feds action on Thursday. We will spend time scanning and digging into the various ETFs and sectors to find where the best opportunities lie going forward. For now we take what the Fed gives and manage our risk one day at a time.