Monday, October 25, 2010

Worried about the Economy? Buy Stocks.

Yesterday's New York Times business section had a good piece summarizing the case for buying common stocks.

The economy, as we all know, is not particularly robust. The worse the situation appears, the more likely that another dose of aggressive intervention by the government. A number of Fed officials have signaled over the past several weeks that QE2 is likely to occur next month in an effort to stimulate the economy.

If the Fed floods the capital markets with more liquidity, it seems pretty likely that a good chunk of this stimulus will wind up in the stock market, boosting stock prices as we head into year-end.

So we are in this somewhat perverse environment: The worse the economic situation appears, the more likely the Fed will intervene aggressively, and stocks could rally.

And then, if the stimulus works, the Fed will begin to withdraw its support, and probably try to raise short term interest rates. This would be likely to hurt stocks.

So if you're worried about the economy, and you're an investor, there seems to be only one course of action (for at least the next few months): Buy Stocks.

Here's an excerpt from the article:

So the Fed appears to be gearing up for further unconventional action — the launching of a second round of “quantitative easing,” or QE2, as it’s being called.

While the details aren’t clear — they are expected to entail the purchase of more Treasury securities, and the expansion of available credit in the financial system — the general outline of Fed policy has seemed evident to market strategists for weeks.

“The Fed is easing,” says Ralph Acampora, a veteran market analyst and a partner at Altaira Wealth Management. “When that happens, stocks tend to rise. That’s got to count as good news.”

Mr. Ritholtz puts it this way: “When the Fed opens its fire hose, you’re going to get wet. If you’re smart, you get ready for it.”

Expected Fed Policy Gives Some Solace to Investors -