You can’t say that the central banks aren’t doing everything they can to boost the economy and financial markets. This week, the highlight was the Federal Reserve’s announcement of a third round of quantitative easing, better known as QE3. The Fed will buy $40 billion a month in mortgage-backed securities, which will hypothetically bring down mortgage rates, and put more money in bank’s hands and, eventually, end up in the economy.
So far, the market thinks it’s a good idea. The Dow Jones Industrial Average (INDEX: ^DJI) was up 2.2% on the week, and the S&P 500 (INDEX: ^GSPC) gained 1.9%.
Financial stocks led the charge again this week. Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) were among the top three winners, rising 8.5% and 5.8%, respectively. More easing by the Fed should help bring down mortgage rates, which could not only boost the economy, but also increase the value of the mortgages already on banks' books.
The other big mover this week was commodities and companies that rely on construction for demand. Alcoa (NYSE: AA), maker of aluminum products, moved 8.1% higher this week, on hope that stronger economic conditions would lead to more demand. Commodities like oil, silver, and copper also moved higher on hopes for the economy.
Sometimes, markets forget that there’s a reason QE3 was implemented in the first place. Economic conditions are anything but strong, and last week’s bond purchase announcement by the ECB was out of downright necessity to keep Europe from falling apart. I would stick to stocks that are improving fundamentally, not just rising on speculation of an economic recovery, like many stocks are doing this week.
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