Elections and Quantitative Easing Look Price In (DIA, SPY, QQQQ, USO, GLD, TLT, TBT)

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It is no secret that the elections are Tuesday, November 2, and it is no secret that the FOMC under Ben Bernanke will begin the November FOMC starting November 2 and a decision due around 2:15 PM EST on November 3.  We have taken a look at stocks, bonds, oil, and gold as mere go-to indicators to see what can come from the election and from the FOMC’s highly awaited quantitative easing measures (A.K.A. ‘QE2’).  It is impossible to say that everything is price in at any given point in time.  This also does mean that a major sell-off will come, but for now it seems as though all of the great news expected is largely price in.

We tracked the DJIA, S&P500, NASDAQ 100, Bonds, Oil, and Gold…. Most of these are being tracked via key ETF products of SPDR Dow Jones Industrial Average (NYSE: DIA), SPDR S&P 500 (NYSE: SPY), PowerShares QQQ (NASDAQ: QQQQ), United States Oil (NYSE: USO), and SPDR Gold Shares (NYSE: GLD).  In bonds, we used the ProShares UltraShort 20+ Year Treasury (NYSE: TBT) iShares Barclays 20+ Year Treas Bond (NYSE: TLT) as liquid instruments to track the long-term bond market.

You already know that stocks and commodities rose in September and then again in October.  Historically that is a great measure and the market returns were some of the best seen in years on a relative basis.  Maybe the returns were not the same as companies selling iAnything.  Still, the returns were very impressive.

What is priced in depends upon whom you ask.  As far as the elections, it is priced in that the Democrats will likely lose the majority of the House of Representatives but not the Senate.  In short, gridlock is the consensus. If the market knows this or is factoring it in, then the (highly debated) efficient market theory would indicate that the market has priced it in.

As far as QE2, there is still some debate out there over just what quantitative easing will look like.  There is also a debate over its outcome.  The FOMC has no room to cut rates on the Fed Funds.   Last week there was a TIPS inflation adjusted T-Note auction that actually has a negative yield due to the calculations.  What is likely is that the Fed will increase the government balance sheet again by buying longer-dated Treasuries and maybe by buying mortgages or other debt instruments.  For argument sake, just assume it is Treasuries.  The goal is print money and then turn around and spend it to buy down the longer-end of the maturity curve to send yields lower.

In theory, stocks should reflect this as well if it is all really known.  Nearly gone is the debate over the double dip recession.  Gold is the new currency as it seems that major governments are in a race to devalue the currency values to drive up exports.  Oil runs often inversely with currencies, and the old inverse relation between stock market prices and oil prices is no longer.

Bonds saw a wild swing.  At the end of August, the Long-Bond yield was challenging 3.50% for the 30-Year.  That yield is now more than 4.0%.  The new anticipation is that QE2 will be present but will be sporadic and measured through time rather than all at once or all in a short period of time.  It almost sounds like a stock buyback now at this point.  Now Bill Gross has even implied that he long bull-market in bonds is over.

SPDR Dow Jones Industrial Average (NYSE: DIA) showed a return of 4.97% in September and then in October it gained by an additional 2.76%.  That shows a cumulative return of 8.28% for the two months combined.

SPDR S&P 500 (NYSE: SPY) showed a return of 5.22% in September and then in October it gained by an additional 3.38%.  That shows a cumulative return of 9.25% for the two months combined.