Tags: McCaughan | end | QE2 | easing | Stock | Opportunities

McCaughan: End of QE2 Will Unveil Stock Opportunities

Friday, 10 Jun 2011 01:56 PM

The end of quantitative easing (QE2) — Federal Reserve liquidity injections designed to pump up stock prices and economic growth — will cool an equity rally, but investors should still look for opportunities in stocks, says Jim McCaughan, CEO of Principal Global Investors.

Stocks are set to finish the year in positive territory, so when the Fed halts pumping money into the system, investors should look for longer-term opportunities when indices correct.

"I think there should be a positive year on U.S. equities, maybe a 10-20 percent positive year for U.S. equities," McCaughan tells CNBC.

"The right thing to do is to buy on setbacks, because the expansion could last for a couple of years."

Under QE2, the Fed buys $600 billion in Treasurys held by banks in order to get those banks to lend and invest in stocks.

The program has sent stock prices rising and was also good policy when it started because the U.S. economy was battling a liquidity problem.

Now that the economy is able to stand on its own, even if it is still a little weak, the Fed will not likely resume pumping up stock prices via easing.

"Expansion in the economy that is based on a lot of credit is not sustainable and ends in tears. In this recovery we have quite high personal savings in the U.S. We have slow grinding job creation — it is happening. And so long as Washington or the E.U. don't get too much in the way, that expansion will last another year or two," McCaughan says.

"So I am looking nervously at public policy but nevertheless I think still I am prepared to buy on setback."

The downside to quantitative easing, critics say, is that it creates inflation and jacks up gasoline prices, and continuing such policy would be detrimental to growth.

A lot of that money ends up investing in commodities, and some blame it for the high price of oil these days.

"The problem is that if you keep on at QE and create that inflation in commodity prices, those commodities are the input to U.S. industry, so that ultimately squeezes markets. Nothing has hit small-business confidence in the last few months as much as $4 gasoline," McCaughan says.

More money spent on gasoline means less money spent on adding to payrolls.

"Ultimately QE hurts jobs and over the next year or so would ultimately be bad news for the market."

Others agree that should the Fed renew quantitative easing, stocks would fall after an initial jump as investors would realize fundamentals for many such stocks would not support gains fueled by Federal Reserve policies.

"We become excessively bearish if the Fed goes to QE3," Brian Belski, an investment strategist at Oppenheimer & Co., tells Bloomberg Television.

"We do not want to see QE3," Belski adds.

"We think that only prolongs the inevitable when the Fed has to eventually sell these securities that they have been buying."

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The end of quantitative easing (QE2) Federal Reserve liquidity injections designed to pump up stock prices and economic growth will cool an equity rally, but investors should still look for opportunities in stocks, says Jim McCaughan, CEO of Principal Global...
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