As Fed—and Markets—Pull Back, What Can Investors Do? - CNBC

As Fed—and Markets—Pull Back, What Can Investors Do? - CNBC
Published: Friday, 10 Jun 2011 | 4:03 PM ET

By: Jeff Cox
CNBC.com Staff Writer

Now that QE2 is nearly history, QE1 a distant memory and QE3 increasingly unlikely, markets are charting what looks like a QE retreat.

Thomas Lohnes | AFP | Getty Images

Investors appear to be settling into a reality that the Federal Reserve is done with its quantitative easing—or QE—programs, a position cemented earlier this week in remarks from central bank Chairman Ben Bernanke.

That has turned into a significant development for the markets; the S&P 500 [.SPX 1270.98 -18.02 (-1.4%) ] has dropped 2 percent this weekand is in the midst of a nearly 7 percent slide that began off the post-financial crisis highs of May 2.

While much of the loss in investor confidence can be traced to a decline in several key economic indicators, the loss of Fed asset-buying support has been the theme in the most recent leg down.

Jeff Cox
Staff Writer
CNBC.com

So with a slide Friday capping an ugly five-week stretch, the main question that seemed to loom was how bad the damage would get, and what investors should do as the market lets go of the Fed's head and moves forward.

"If you look at what values have been rising over the course of the quantitative easing program, it has been merely commodities and equities, nothing else," says Brian LaRose, strategist at United-ICAP in Jersey City, N.J. "Reality is starting to take hold."

LaRose believes that the end of easing will pop a bubble in stocks and commodities such as gold and oil, leading to a safe-haven surge in the US dollar. The greenback has lost nearly 10 percent of its value against the world's currencies since Bernanke signaled QE2 in a speech at Jackson Hole, Wyo., late in August 2010.

"The reality of the economic landscape is things have not gotten better. Home prices are still falling, people are still under water, people are not going back to work," says Brian LaRose, strategist at United-ICAP in Jersey City, N.J. "That's what drives this economy—consumer spending and housing. If you can't get those core ingredients, you have a recipe for a disaster and not for recovery."

"We have mountainous inflation efforts in place with historically low yields and strong demand for bonds. That's like a rubber band that's going to snap at some point and somebody's going to get hurt.”

Bill Larkin
Portfolio manager
Cabot Money Management

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