Did it really work?

It’s a question many investors are pondering seven months after the conclusion of the Federal Reserve’s massive quantitative easing (QE) program, in which trillions of dollars were pumped into the banking system from 2008 to 2014. The aim was to shock the ailing economy into recovery by providing a flood of cash for banks to lend at ultra-cheap rates.

It was an unprecedented move that possibly forestalled a more severe economic downturn, perhaps even a depression. However, the program continued long after the U.S. economy was out of crisis, mainly because of the belief that QE could generate robust, sustainable long-term growth by facilitating lending, business investment and hiring.

The economy is so complex that such a hypothesis may take years to confirm or disprove. But in the meantime, there are plenty of compelling signs that QE is nothing near the growth driver that policymakers had hoped.

Vulnerable Economy

Perhaps the most obvious sign of QE’s limits is how quickly the economy lost steam when the program ended. After surging by a 5% annual rate in the third quarter of 2014, gross domestic product (GDP) rose just 2.2% in the fourth quarter. The slump in growth coincided with QE’s cessation early in the quarter.

Economists estimate that GDP inched up by a mere 0.2% in this year’s first quarter. Later revisions could show that the economy actually shrank slightly in Q1, and projections for second-quarter results are already tumbling.

Recent productivity reports are also disappointing, showing only a 0.6% gain during the one-year period ended in April. Against a backdrop of faster-rising labor costs, weak productivity could further threaten already falling corporate profits.

Weak Investment And Lending

Although QE is supposed get banks lending and companies making capital investments, recent data suggest it does neither very well. For instance, U.S. corporate investment as a percentage of GDP remained flat between 2008 and 2014, even though companies have accumulated record cash hoards.

#-ad_banner-#This year, total S&P 500 capital expenditures (capex) will fall by 11% to $642 billion, analysts estimate. The projected drop would shrink capital expenditures to its lowest level since 2011’s $592 billion total, Reuters says.

By sector, only materials and financial firms are expected to increase capex this year. Put another way, flat or declining capex is forecasted for eight of the 10 sectors. Energy firms are apt to show the sharpest spending cuts because low oil prices have made many new exploration projects unprofitable.

For several years, economists have lamented the relative lack of loan-making despite the banking system being awash with cash. During the one-year period ended in January, for example, lending by U.S. banks to households rose by only 3%, even though reserves available to loan soared by 59%.

First-quarter data showed continued weakness in new-mortgage demand and a significant drop in mortgage refinancings. Both types of lending activity were in a downtrend throughout QE, and projections by the Mortgage Bankers Association suggest they’ll remain at multi-year lows.

Rising Inequality

Fed officials have often touted the “wealth effect” of QE, which tends to drive up the prices of stocks, bonds and other assets. The theory is that when investors see their portfolios grow, they feel wealthier and are more apt to spend, stimulating the economy.

Trouble is, less than half the U.S. population even invests in stocks or bonds, and those that do typically have meager account balances. So the only segment to see a significant benefit is higher-net-worth households that already have large investment portfolios and plenty of spending power.

One piece of data to support this: between 2008 and 2013, when QE mostly took place, disposable income rose by double-digits for the top 10% of wealthiest households. Meanwhile, the bottom 10% actually saw their disposable income shrink, according to the Organization for Economic Cooperation and Development.

Simply put, QE made the rich richer, which only worsened the economy-squelching inequality gap.

Elusive Inflation

A certain amount of inflation is considered a sign of a healthy economy. But in the United States, the inflation rate remains weak and could be signaling troublesome deflation.

The Consumer Price Index, the most commonly used inflation gauge, fell 0.2% during the one-year period ended in April, according to the Labor Department. The index measures price changes for a variety of consumer goods and services such as food, clothes, gas and cars.

The Producer Price Index, a measure of wholesale prices charged by manufacturers, looks even weaker, posting a year-over-year decline of 1.3%. That’s the largest such decrease since 2010.

Despite the worrisome picture they paint, current inflation trends are often downplayed. Some experts blame subdued readings on low energy prices and the strong dollar. Others point to the core inflation rate, which excludes food and fuel. While core inflation is more in line with the Federal Reserve’s overall inflation goal of 2%, it simply doesn’t tell the whole story.

Risks To Consider: Nearly seven years after the financial crisis, the U.S. economy still may not have achieved a sustainable recovery. Without the proverbial punch bowl in place, growth quickly stalled.

Action To Take –> Though record stock prices might suggest otherwise, this is a time of high risk for the financial markets. QE has driven asset values well beyond what current economic conditions warrant. Any significant shocks could send prices tumbling.

Thus, it would be prudent to hold substantial cash. Investors should select the proportion that’s best for them based on key factors used to determine asset allocation, such as time horizon, risk tolerance and financial goals.

Beyond cash, investors are best off playing defense with the stocks of high-quality, dominant companies that have a long history of paying generous dividends. Wal-Mart Stores, Inc. (NYSE: WMT), defense contractor Lockheed Martin Corp. (NYSE: LMT) and cigarette maker Altria Group, Inc. (NYSE: MO) are just three prime examples.

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