After the recent QE3 announcement on the 13th of this month we saw a nice rally in the stock market. What the heck has been going on since then? Well, I have been saying all along that it was a "sugar high". Each time the Fed has poured money into the this market the response has been less noticeable. Today we see the Volatility Index (VIX) the so-called "Fear Gauge" up 5.5% and for the week up a little over 16%. So that tells us that we should experience more volatility in the weeks ahead.
But wait, I thought we were to believe that QE was good for stocks? As a general rule one could make a strong argument to support that claim but like I mentioned, each time it seems to have less of positive effect.
So, what is really going on? We know that "easing' is inflationary and has little to do with job growth. That said, we see oil prices dropping, which by the way could change quickly with all the tension in the middle east and the threat of Iran focusing on Israel. Food prices are still rising as are most consumer goods, income levels are at 1995 levels again with individual wealth is dissipating at a rapid rate, business is mostly on hold until the election.
What to do now. Start by having target allocations in place that support and protect you from market corrections and political news headlines. I often talk on my radio show about doing things different in this market because of the volatility that is present. It starts with those asset targets and how you form the correct mix of equities and fix income assets in your portfolio.
I still see some investors that want to besold the old asset models like 60% stocks and 40% bonds, not realizing that 90% of their risk comes from only that 60% stock allocation. Their bond portion are non-core asset bonds that do not address rising inflation or any real protection from financial collapse. Yet some like the old model, I guess it's like an old pair of slippers it just feels comfortable. I say beware and proceed at your own financial demise!
