Why did the Dow Jones Industrial Average (INDEX: ^DJI) take off today?

Three little letters (kind of) – QE3.

As nearly everyone and their mom had anticipated, Federal Reserve Chairman Ben Bernanke announced the initiation of the third round of bond purchases, aimed to support to sluggish U.S. recovery. 

The deets?

The Fed will $40 billion each month of agency-backed securities.  The purchases will occur on an open-ended basis, which is intended to give the Fed ample flexibility to modify the purchasing scheme should the outlook for the economy shift.  The Fed will also continue its Operation Twist, under which the central bank sells short-term bonds and uses those proceeds to buy long-term bonds.  Ultimately this amounts of more printing of money, a controversial move, at a time when American sentiment regarding Fed, its policies, and the role it should occupy in driving the economy is increasingly polarized.

As should also be expected, this set of a massive afternoon rally in the financial markets as the announcement crossed newswires just after midday.  The Dow, for example, logged effectively all its gains afterword?  Coincidence?  Of course not.


 

Source: Google Finance

The S&P 500 and Nasdaq rallied in similar fashion, spiking 1.6% and 1.3%, respectively. Bets on volatility, often referred to as the market’s "fear gauge," the VXX (NYSE: VXX) tanked 11%, as the Fed’s renewed commitments drastically reduce the chances of further deterioration in the U.S. economy.

The news from the Fed, and prospects of further increasing the money supply, sparked a rally in non-financial assets, as well.  Both gold and silver markedly outperformed the broad U.S. indexes, with the SPRD Gold Trust (NYSE: GLD) jumping 2.0%, and the iShares Silver Trust (NYSE: SLV) surging 4.4%. 

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Andrew Tonner holds no financial position in any of the securities mentioned in this article. You can find Andrew and all his Foolish writing on Twitter at @Andrew Tonner.

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