QE2: Potential Winners and Losers
Ben Baden

 

Experts say savers will be hit the hardest

As expected, the Federal Reserve will once again engage in another round of quantitative easing. In the second round, the Fed will purchase another $600 billion of longer-term treasuries by the end of the second quarter of 2011, at a pace of about $75 billion per month. The goal: to push interest rates lower, which is aimed to encourage more borrowing and help jumpstart the economy and the job market.

Quantitative easing has come under a great deal of scrutiny over the past few months. It's considered one of the last monetary tools the Fed has left since it has already set the federal funds rate at virtually zero.

The $600 billion was higher than expected, if only modestly. Experts say the Fed's primary concern is preventing the economy from falling into a deflationary trap.

"The Fed is obviously still in the deflation camp, and that's why we're doing QE2," says John Derrick , director of research at U.S. Global Investors. "They still feel like that's the biggest risk."

Whether the Fed accomplishes its stated goal with this plan is still up for debate, and much uncertainty remains. Here are a few potential winners and losers

Risk-takers (Winners).

In times of uncertainty, it sometimes pays to take risks. Since the downturn following the financial crisis, many investors have been wary of reinvesting their money in the stock market. Cautious investors who have chosen to sit on the sidelines in low-yielding money market accounts and other low-risk investments have missed out on a rally that stretches across a number of asset classes including stocks, bonds, and even commodities. "If the Fed succeeds, the losers on a relative basis are going to be the investors in cash," says Robert Tipp, chief investment strategist for Prudential Fixed Income. "The winners are going to the ones in the riskier fixed-income sectors whether they be emerging markets, high yield, or lower mid-grade corporate bonds -- and obviously equities."

Hard assets (Winners).

"I think [QE2] is good for asset classes like commodities and gold, and those kind of things that are real, hard assets that would probably benefit from a more inflationary environment," Derrick says. Precious metals like gold and silver have rallied since the depths of the financial crisis. Some investors, like Derrick, view gold as a type of currency that will perform well when investors lose faith in paper currencies and look for a safe haven. Both metals have reached historic highs in recent weeks. Year-to-date, SPDR Gold Shares ETF (GLD) is up 23 percent, while ETFS Physical Silver Shares ETF (SIVR) is up 47 percent.

Stocks (Neutral).

After Fed Chair Ben Bernanke hinted that the Fed would engage in another round of asset purchases in August, the markets took off. Prevailing wisdom says the rally should continue. "The sense is that a lot of this liquidity is going to slosh into the financial markets and those that are already in the financial markets are going to be the beneficiaries," says Jack Bauer, managing director of fixed income with Manning & Napier, an asset management firm. But some experts say the rally could already be baked in, since the Fed made its intentions known months ago. "As repeatedly noted, the market is a forward-looking mechanism, and we wouldn't be surprised to see some 'buy the rumor, sell the news' action," according to a recent note by the Schwab Center for Financial Research. In other words, investors may have bought into the rally months ago, and it could be coming to an end.

Savers (Losers).

Experts have long said that quantitative easing punishes savers for their good behavior. "The people that have been hurt the most in this crisis have been the savers -- the prudent people who put money away," Derrick says. "From a saver's perspective, I really don't see that much relief in sight." The Fed's goal is to keep rates low, which has consequences for income-hungry investors. The yield on the 10-year treasury note has hovered around 2.5 percent for most of the latter half of 2010. Historically, rates have been much higher. In mid-2007, when economic growth was much more robust and demand for treasuries was much lower, 10-year treasuries were yielding as much as 5 percent. Many older investors and retirees depend on the income they receive from their investments in high-quality bonds like treasuries.

The dollar (Loser).

More quantitative easing by the Federal Reserve means more dollars will be printed. The worry for many U.S. investors is the future of the greenback, as more dollars (actually, bank reserves) in circulation dilutes the currency's value. "The Fed has basically cut interest rates to zero and this is basically the last thing they can do," says Chuck Butler, president of EverBank World Markets, an investment firm that offers savings accounts with foreign currencies. "Any time a country goes and cuts rates, historically, currency people view that as a debasement of a currency."

 

 

QE2: Potential Winners and Losers

 

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