QE3 is still in play, so how should investors play it?
Federal Reserve Chairman Ben Bernanke didn't announce a new round of bond buying to boost the economy in his closely watched speech Friday in Jackson Hole, Wyo., but he didn't take a third round of what's called quantitative easing, or QE3, off the table, either.
That easing, of course, is aimed at pumping cash into the economy and keeping interest rates low to stimulate demand for things such as cars and homes.
So, assuming the Fed launches QE3 at some point this year, here is an investment playbook based on the types of investments that posted strong gains following the announcements of QE1 and QE2.
After analyzing the Fed's first two phases of quantitative easing, Ned Davis Research commodity analysts John LaForge and Warren Pies came up with a list of investments that history suggests will be "odds-on favorites" to perform well if a QE3 rally occurs.
LaForge and Pies stress that handicapping potential QE3 winners isn't easy, mainly because QE is a relatively new concept. There are only two data series to study. And it's not clear that a QE3, if there is one, would follow a path similar to prior Fed easings.
That said, here are some plays to consider. Many are in commodities and precious metals, as these sectors and stocks tend to do well when the economy benefits from a wave of fresh liquidity or when there is a risk of inflation.
The Thomson Reuters Continuous Commodity Index, for example, a basket of 17 commodities including copper, crude oil, gold and silver posted gains of 32% after QE1 and nearly 27% during QE2, which was basically in line with gains posted by the broader stock market, NDR research shows.
The S&P 500 has risen 65% since the Fed announced QE1 in late November 2008, but is up 108% from its March 2009 low, the month the Fed expanded its asset purchase program by more than $1 trillion.
"QE3 will likely have a play for everyone," the analysts wrote in their report. "Odds-followers should buy silver. Contrarians should look hard at owning detested coal stocks. And for those who want to participate in a QE3 rally, but with less volatility, buy gold."
Investments to consider if QE3 happens:
1. Gold. Quantitative easing makes gold a good choice because the bond buying tends to devalue paper assets, such as the dollar. Flooding financial markets with cash also can lead to inflation. Gold and other so-called "hard assets" are viewed as a hedge against both.
During QE1 gold outperformed the broad CCI commodity basket by nearly 3 percentage points, although it underperformed by 5.5 percentage points after QE2.
No matter. "Own gold during QE3," the NDR analysts say. "Gold's average performance is not all that bad, considering its lower-than-average volatility."
Gold rose $30.50, or 1.8%, to $1685.30 an ounce Friday, the day of Bernanke's speech.
2. Silver. If you have the stomach to deal with sharp price swings, buy silver. "QE seems to bring out the best in silver," NDR says. Indeed, silver soared nearly 69% following QE1 and nearly 82% during QE2.
The iShares Silver Trust SLV exchange traded fund (ETF) rose almost 4.6% Friday to $30.79.