Stocks Soar after FOMC Announcement; Will it Last?

Ben Bernanke and the FOMC gave the people what they wanted today with QE3 today. So it’s no surprise that markets surged to multi-year highs in the hours after the announcement.

The S&P 500 shot up 1.6% and the Dow added nearly 200 points to both close at their highest levels since late 2007. The question is: How long can the markets continue to prosper when the day’s message was all about how much the U.S. economy is struggling?

As our own Andy Crowder wrote yesterday, market reaction to each successive round of economic stimulus since the recession has grown increasingly modest.

Stocks shot through the roof after QE1 in early 2009, got a nice push after QE2 in late 2010, went on a decent run after Operation Twist was announced in late 2011 and got a comparatively mild boost when Operation Twist was extended earlier this year.

Now that QE3 is here, don’t expect stocks to go any kind of major run like we saw with QE1 or QE2 – especially with many of them already trading close to five-year highs. If anything, this latest push should be more modest than what we’ve seen since the Operation Twist extension, with the Dow gaining less than 4% in roughly three months.

Ben Bernanke said the Fed intends to buy $40 billion of mortgage-backed securities a month until the unemployment rate – which hasn’t been below 8% for almost four years now – comes down in a “sustained way.”

“I do think (QE3) has enough force to help nudge the economy in the right direction,” Bernanke told reporters today.

Whether it has the power to “nudge” the economy as much as past stimulus efforts have seems less certain.