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I’m positive, but it’s the economy now stupid!

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by Peter Switzer

The post-QE3 optimists still outnumbered the pessimists one day after the momentous decision by the Fed to spend $40 billion a month on buying bonds until jobs are created in the US!

Let’s look at the Friday reaction from Wall Street where the Dow was up 53.51 or 0.4 per cent to 13,593.37 while the S&P 500 put on 5.78 0.4 per cent to finish at 1,465.77.

Considering this is the scariest month of all for Wall Street, it underlines how important the measures from the Federal Reserve and the European Central Bank (ECB) have been. But what’s next?

That’s simple – we have to see economic improvement in the US, China and Europe. Of course, the next US reporting season could be a challenge and I would not expect great news because these will be company results from a tough period of economic growth in all of the three geographic areas that drive demand – Europe, China and the US.

The economy will be the main game but you can’t expect to see an instant improvement. However, if nothing shows by three months – December, and this will be after the US election and the Congress will be dealing with the ‘fiscal cliff’ issue – then the Yanks might not give us their predicable Santa Claus rally.

Of course, if Wall Street likes or at least is not spooked by the US election result and the falling over the fiscal cliff is resisted, avoiding a potential US recession, it will be important for generating more stock price growth next year.

I like seeing the US fear index or VIX at 14, which suggests that stocks can go higher in the near-term.

However, there will be a pullback eventually – there has to be – but if we can get some signs that the ECB’s stimulus programs and QE3 are working to generate economic growth then stocks will go higher.

Our job will be to play the watcher for our readers, so we can predict what lies ahead. So far, we have been on the money and I have to admit I have a gut feeling that the stimulus programs will work this time because the big negatives that have hurt confidence – such as Euro-anxiety, a China slowdown and a jobless US recovery – have all been dealt with at the same time.

So, we are now in an economic growth watching game and I did like the fact that the Thomson Reuters/University of Michigan’s index of consumer sentiment spiked to its best reading in four months.

Also, retail in the US was up for the second month on a trot but industrial production was down significantly.

It’s a mixed economic bag but as I say, it will take at least three months, maybe six, before we can argue that QE3 is working.

Significantly, there will be some key economic readings this week in the US on manufacturing, housing, the Philly Fed survey and leading indicators.

Some good news would be a bonus but they won’t be QE3-related. It’s a waiting and watching game ahead – so what’s new?

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, September 17, 2012

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