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Rallying Around Bernanke

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No surprises here: Ben Bernanke and the Federal Reserve announced plans this afternoon to purchase another $600 billion of Treasuries, resuscitating a "quantitative easing" (QE) program that had expired in April.

This was 100% expected. And so much ink has been spilled regarding this plan that I won't waste your time repeating what's already been said ad nauseum.

Instead, here's an interesting question to ask: Did expectations of today's Fed annoucement fuel the past two months' market rally? Conventional wisdom says yes. The blog Pragmatic Capitalist thinks otherwise:

It's become popular to cite the recent market rally, dollar decline and commodity rally as evidence that QE works. Of course, most of these investors forget that this rally did not start with QE (in fact, the market fell in August in the face of QE rumors). This rally started with the August ISM Manufacturing report that came in well above expectations. The market sentiment at the time was very depressed, deflationary and generally expecting a double dip. But better than expected economic data and strong earnings have largely alleviated these fears (in fact, they have been flipped entirely as investors are very bullish and believe inflation is right around the corner).

The Fed's trigger-happy fingers surely had some impact on stocks, but I can't help thinking it's been token at best. A major concern over QE is that it'll increase the monetary base without expanding bank credit -- your classic pushing-on-a-string analogy. Indeed, most non-conspiracy theorists believe that another round of QE will increase inflation and GDP growth by negligible amounts over the coming year. Hardly anything to get giddy about.  

Earnings, meanwhile, are blowing the doors off the market. Companies such as Coca-Cola (NYSE: KO  ) , Procter & Gamble (NYSE: PG  ) , and Caterpillar (NYSE: CAT  ) are pulling in strong results based on stronger-than-expected global growth. Even recession-vulnerable stocks like Ford (NYSE: F  ) and Las Vegas Sands (NYSE: LVS  ) are doing far better than expected.

And this isn't just a story about growth from abroad. The domestic economy isn't doing nearly as poorly as some pretend. Measures of consumer demand and manufacturing are far stronger than most assumed two months ago, when the words double dip were everywhere.

Can't a rally be based on better-than-expected news, not just a manipulating Fed? You tell me in the comment section below.

Fool contributor Morgan Housel owns shares of Procter & Gamble. Coca-Cola is a Motley Fool Inside Value selection. Ford Motor is a Motley Fool Stock Advisor pick. Coca-Cola and Procter & Gamble are Motley Fool Income Investor picks. The Fool has established a bear put spread position on Caterpillar. The Fool owns shares of and has written covered calls on Procter & Gamble. The Fool owns shares of Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 04, 2010, at 11:29 AM, prime99 wrote:

    Central bankers in Asia feel double crossed by US plans for quantitative easing. A few weeks after G20 members pledged not to devalue currencies in order to spur growth, the United States is doing just that. Even more worrisome are the fears of surging capital inflows into emerging markets causing bubbles to develop in several sectors. Here is glimpse of what a Real Estate bubble bursting in Beijing would look like.

    Chinese Real Estate Crash Scenario-

    A recession in China, would nix the global recovery

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