QE3 Bounce Isn't Sure Thing (WSJ)

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Mirror, mirror on the wall, what's the fairest QE of them all?

Investors are hoping it will be the round of quantitative easing, or bond buying, the Federal Reserve is expected to announce Thursday. But that may be wishful thinking.

Since the expansion of "QE1" on March 18, 2009, the bang for the buck from subsequent rounds of unorthodox monetary policy has resulted in shorter and weaker rallies. While there is no guarantee the Fed will act, most investors agree that if it moves forcefully then "high beta" assets will rally. That means the more volatile variety of financial asset that tends to shine at times like these, not the latest health supplement.

Just as vitamins B-1, B-6 and B-12 all sound similar and behave differently, though, a rising tide of cheap money not only doesn't lift all risk assets equally—it doesn't lift some of them at all.

Averaging the performance a month before and a month after the four previous announcements of unorthodox monetary policy (QE1 came in two halves), the best-performing asset was small-capitalization stocks. They underperformed the S&P 500 by 6.4% in the month before a move by the Fed and beat it by 8.6% the month after. The next best was a basket of financial companies represented by the Financial Select SPDR exchange-traded fund, lagging behind by 3.1% a month before and beating by 6.5% after.

Despite the notion that investors bid up hard assets after the Fed acts, an ETF of energy stocks and gold both lagged behind the market the month after rounds of easing were announced. In three of four instances, gold performed better before than after the announcement.

The superior performance of stocks suggests that while some investors may react to a perceived debasement of the dollar, most just feel comfortable taking more risk when the printing presses roll.

But the Fed's coming move has been so well-telegraphed that it is probably too late to ride a bounce in high-beta assets, assuming there even is one. Small-capitalization stocks and financials already have beaten the broad market in the past month.

Perhaps the question is whether, having bought the QE3 rumor, investors will sell the fact. If they do, risky assets will bear the brunt of it.

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