On September 13th, Federal Reserve Chairman Ben Bernanke announced that the Federal Reserve would expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing. This is the Federal Reserve’s third round of quantitative easing and therefore, it is called QE3. Following the announcement the Standard & Poor’s 500 Index rallied higher by 23.42 points or 1.6%, and the Dow Jones Industrial Index rallied higher by 206.5 points or 1.55%.
This article will focus on four sectors of the stock market that should benefit from the initiation of QE3. Quantitative easing occurs when the Federal Reserve buys government securities and other securities in order to increase ends to increase the dollar supply. An increased dollar supply reduces the value of the dollar, which leads to lower interest rates, and pushes investors to leave dollar based investments, for more stable hard assets. Hard assets such as silver and gold have already rallied in anticipation of QE3.
Past QE’s have worked out extremely well for the price of silver. Following QE1 the price of silver rallied by almost 69%, and after QE2, the price of silver moved higher by nearly 82%. The iShares Silver Trust (NYSE:SLV) is currently trading around $34 per share and since the QE3 announcement the share price has increased by 4.3%.
The iShares Gold Trust (NYSE:IAU) is currently trading around $17 per share and since the QE3 announcement its share price has increased by 2.3%. The iShares discussed above are ETF’s that are structured to mimic the overall price of the commodities for which they are named. Many investors prefer to invest in iShares rather than individual gold or silver mining stocks, because they are a good way to avoid the operational risk of individual mining companies.
Another way to invest in these precious metals is through gold and silver streaming companies. Precious metal streaming companies do not directly operate mines. These companies contract with mining companies to pre-purchase the production of mining companies for a predetermined price. This means that streaming companies have limited operational risk, and that their earnings are closely tied to the market price of silver or gold.
The largest silver streaming company is the Silver Wheaton Corporation (NYSE:SLW). Silver Wheaton is currently trading at around $38 and since the QE3 announcement the share price has increased by 8.6%.
The largest gold streaming company is the Franco-Nevada Corporation (NYSE:FNV). Franco-Nevada is currently trading around $59 and since the QE3 announcement the share price has increased by 10%.
Another sector that could benefit from QE3 is the oil sector. Stocks in the oil sector have also done well after QE’s. In the aftermath of the 2010 QE2, oil prices moved higher by $40. It seems that the increased money supply draws investors into commodities such as oil.
Two of the top picks in the oil sector are Marathon Oil Corporation (NYSE:MRO) and Chesapeake Energy Corporation (NYSE:CHK).
Marathon Oil is currently trading around $31 and since QE3 was announced the stock price has increased by 7%.
Chesapeake Energy is currently trading around $21 and since QE3 was announced the stock price has increased by 3.1%.
A third sector of the stock market that could benefit from QE3 is the homebuilders sector. One of the primary reasons that QE3 was initiated was to help homeowners and homebuyers by keeping interest rates low. Low interest rates increase bank reserves, which gives them an incentive to lend. Low interest rates also give individuals an incentive to purchase a home. If the number of new home buyers increases, the homebuilders stocks should do well. Three of the top stock picks amongst the homebuilders are Hovanian Enterprises Inc. (NYSE:HOV), D R Horton Inc.(NYSE:DHI) and Lennar Corporation (NYSE:LEN).
Hovanian is currently trading around $4 and since QE3 was announced the stock price has increased by 6%.
D R Horton is currently trading around $22 and since QE3 was announced the stock price has increased by 7%.
Lennar is currently trading around $37 and since QE3 was announced the stock price has increased by 5.6%.
A fourth sector of stocks that could benefit from QE3 is the bank stocks. The new round of easing will increase the reserves for banks and induce them to lend more. Two banks stocks that are positioned to do well as a result of QE3 are Bank of America Corporation (NYSE:BAC) and Wells Fargo & Company (NYSE:WFC).
Bank of America is currently trading around $10 and since QE3 was announced the stock price has increased by 6.4%.
Wells Fargo is currently trading around $36 and since QE3 was announced the stock price has increased by 5.2%.
The Federal Reserve’s decision to initiate QE3 will probably benefit a large number of stocks. After all an increased money supply and lower interest rates should stimulate the economy and benefit wage earners, and the companies that supply them with goods and services. If history is a guide, the stocks in the market sectors discussed above are well positioned to benefit from QE3. Investing in the stock market is inherently risky, therefore prospective investors should do further research.