As is often the case, mainstream expectations have just been shattered. From my reading/observation of commentary the expectations were:
No QE3 = Market plunge
QE3 = Market soars
When something is so certain the market tends to throw a curveball and surprise us.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.
In my opinion the recent crash has caused significant damage to global markets (technically and confidence levels) and any moves higher from here should be considered bear market rallies.
If Gold can maintain its price (consolidate) after its recent run or even continue higher from here (and the markets in general see a bear market rally in a ‘risk on’ event) then we should see a huge push higher for Gold stocks. Over the last couple of days I have increased my exposure to Gold stocks. They now make up around 50% of my portfolio (up from roughly 20% last week), 35% in physical metals and the remaining 15% in cash. I am ready to rebalance this at any stage where required mind you, recent action in the Gold stocks suggest they aren’t guaranteed to hold up against the force of the general stock market (even if Gold is rising in price).
Eventually the market will get sick of the Fed who cried wolf though (talking up the market with a hint of QE3) and my suspicion is that when QE3 is eventually launched that we will see the market spike up for a short period and then resume it’s downtrend. A sustained rally like we saw during QE2 seems unlikely.