Stock Dive Turns Rally on QE Tease

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A steep fall in stocks reversed late last week as investors bet on a new round of money printing from the Federal Reserve.

The current round of quantitative easing by the U.S. central bank, known as QE 3 or QE Infinity, is set to expire in October as the bank stops buying bonds in its latest round of loose monetary policy that has helped stocks see high returns in 2013 and early 2014. That bull market turned bearish in October as the money spigot was set to turn off, and stocks lost nearly 10% of their value at the peak within a week as investors looked to limit risk exposure if the lack of money caused a decline in stock performance.

Seeing the stock market turn, the Federal Reserve was quick to act. On Thursday morning, President and CEO of the Federal Reserve Bank of St. Louis said that the Fed should extend its bond-buying program beyond October. After his remarks, the Stoxx Europe 600 Index saw its highest jump in three years, and U.S. stocks rose nearly 2% at their highest point during Friday trading.

Good Economic News Bolsters Equities

Beyond hints from the Federal Reserve, stocks were also lifted by a number of macroeconomic headwinds late last week, including strong housing starts data and the lowest jobless claims level since 2000, as fewer layoffs and quits indicated less slack in the labor market.

Additionally, improved industrial production and greater demand for commercial real estate hinted that investors and entrepreneurs were anticipating greater consumption from Americans. Some analysts have suggested that companies could see strong revenue growth during the holiday season and in early 2015, as low heating and gas prices allowed greater discretionary spending amongst Americans.

Additionally, consumers seem more willing to spend than ever, thanks in part to lower energy prices and declining joblessness. A new consumer confidence survey released late last week indicated that confidence had reached a seven-year high, even as a slump continued in Europe and growth in Asia, particularly China, was slowing considerably.

Some analysts at large investment banks, particularly Goldman Sachs and Morgan Stanley, have recommended clients to invest more aggressively in United States companies, as greater consumer spending power could bolster U.S. consumers to buy more goods and services.

Fed to Fight Deflation

Cheaper gas could be a target for the Federal Reserve in its latest move. Citing declining prices in oil, James Bullard hinted that the Fed could make gas more expensive by raising the monetary base through more bond buying. U.S. Treasuries fell on the news, as yields rose with greater inflation expectations.

Inflation was initially strong in the United States in early 2014 but began to fall considerably in recent weeks, mostly on falling oil prices thanks to strong production and increased natural gas fracking. The prices of fossil fuels and commodities globally have slid since summer. However, the Fed’s hint at a new round of QE helped pare those losses, with futures rising. Large oil producers saw their stock prices move higher.  Schlumberger Limited, the largest oil field services provider in the U.S., saw its stock jump over 4% in two days.