The End of QE2 (FDX)

Today is the first day of the post-QE2 economy. We've been living under the influence of liquidity injections for the last months. And we enjoyed a spectacular rally that pushed the S&P 500 up 300 points, from 1,050 to 1,360 between September and April.

At this point, there's probably not much reason for us to consider the success of QE2. On the one hand, it cost $600 billion to increase the market cap of the S&P 500 by 30%. That's about $3 trillion in market cap. From that perspective, each of the Fed's $600 billion created $5 in stock valuation.

And investors did take notice (and profits): individual investors have withdrawn $52 U.S. equity mutual funds over the last 9 months. That sum doesn't offset losses from the financial crisis, but most investors probably didn't meaningfully participate in that rally, even though profits were there for the taking.

On the other hand, QE2 was inflationary. The IMF says that a $10-per-barrel rise in oil prices shaves a half-point off U.S. GDP growth. Oil prices rose around $20 a barrel during QE2. So, perhaps we lost a full point of GDP growth, around $1 trillion as consumers had to spend more on energy (and food) and less on other stuff.

Clearly, this is not detailed analysis. There are many more variables at play here. And we can never know how the economy might have performed without QE2. But it's as hard to call QE2 a complete disaster as it is to call it a roaring success.

The bigger issue, for me, is that QE2 pushes the limit of what's acceptable. If the Fed feels free to engage in quantitative easing every time the economy slows, then the U.S. economy will always be imbalanced.

At some point, the U.S. must take its medicine for debt, prices, and jobs. Employment levels and prices must adjust for the current economy, and then grow at a sustainable rate. So far, that's only happening in fits and starts, due to stimulus measures designed to ease the pain. But these measures only delay the inevitable. There is still debt to be worked off (housing), and demand can't normalize until debt is worked through.

In any event, QE2 has ended, and it's likely to be a non-event. The market appears to have adjusted stock prices for the end of QE2.

Still there is much debate about current valuations and economic growth through the end of the year. The coming 2Q earnings season will be very important for the second half of the year.

Also important is how Congress deals with the budget deficit. Simply cutting spending is only half of the solution. The jobs market also needs to be addressed: retraining, adult education -- something needs to be put in place to make the unemployed more employable. Simply waiting for the housing market to recover isn't going to cut it.

If it's any help, FedEx FDX reported a solid quarter this morning and raised its estimates for the current quarter and its fiscal 2012. Notably, the CEO said that "cost headwinds" were subsiding.

Shipping companies make a good barometer for economic activity. The benefit from increased business activity, and are very much affected by rising oil prices. So if the headwinds are subsiding, that may bode well...

I've held FedEx in my $100K Portfolio since it was $82 a share. In January of 2009, I put up $100,000 of my own money to show investors how grow their wealth in the stock market. The overall portfolio is up 44% since.