Fed Actions Push Stocks Sharply Higher

QE3 is here, and investors have rejoiced.

Travis Hoium
Travis Hoium
Sep 13, 2012 at 3:30PM
Markets

And the Fed said QE3 is here.

And the markets rejoiced.

As many expected, the Federal Reserve launched a third round of quantitative easing, which amounts to purchasing of bonds to bring down interest rates -- which, theoretically, spurs the economy. Chairman Ben Bernanke said the Fed would buy mortgage-backed securities at a rate of about $40 billion per month.

The markets applauded the news, and the Dow Jones Industrial Average (DJINDICES:^DJI) quickly jumped 1.45%, while the S&P 500 (SNPINDEX:^GSPC) spiked 1.56%.

The trend in recent days has been for markets to overlook bad news in favor of stimulus, and today is no different. The Fed said that unemployment wouldn't reach 7% until 2014, and a higher-than-expected number of people seeking unemployment this week seems to solidify that assessment.

Financial stocks again led the market higher today. American Express (NYSE:AXP) rose 3.1%, Bank of America (NYSE:BAC) rose 4.8%, and JPMorgan Chase (NYSE:JPM) is up nearly 4% on the Fed news. The accommodative policies in the mortgage market are hoped to boost lending, and if rates fall it could even increase the value of mortgages held on bank balance sheets.

The past week has seen a number of actions by central banks to boost the economy, and stocks -- particularly banking stocks -- have moved higher as a result. But the impact of these actions won't be felt for months. In the meantime, unemployment is high, and it doesn't seem to be improving quickly, so there is still downside risk for investors as we approach earnings season. If stimulus doesn't drive spending higher, it will all be for nothing.

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