Yesterday, the Federal Reserve followed through on its well-telegraphed intent to end quantitative easing (QE) as planned this month. Now investors wonder how this milestone will impact markets, if at all.
Just to recap the recent history of Fed money-printing; QE1 was hatched by then Fed Chairman Ben Bernanke during the darkest days of the 2008 financial crisis, and later expanded to include purchases of Treasury bonds, mortgage-backed securities (MBS) and government agency debt from 2009 to 2010.
With the economy still sluggish in 2010, the Fed launched a second round of bond buying, QE2, which was followed in 2011 by Operation Twist, when the Fed essentially swapped short-term government debt for longer-term bonds.
Finally, Act III of this monetary-policy play began in September 2012, when QE3 was launched. The Fed began tapering the pace of its QE3 purchases late last year, a process the Janet Yellen led Fed continued, until finally confirming yesterday that quantitative easing will end this month — at least for now!
The Fed’s Big Bet
All told, the Fed has invested nearly $4 trillion of money it essentially created out of thin air in various fixed income securities over the past six years. Add in the ongoing reinvestment of maturing debt and the commitment swells to $6.6 trillion, juicing financial markets in the process!
|The Fed’s $6.6 trillion worth of money printing has kept financial markets afloat.|
Now the question is, with QE3 over, will markets react badly, or will QE make a comeback? Here’s my take …
First, Fed officials have debated whether to delay the end of QE amid concerns about a deflationary spiral in Europe. QE3 may be ending, but remember this is the third-round of bond buying after all.
Make no mistake; the Fed won’t hesitate to do even more if the economy weakens further.
Second, the world is still awash in QE with other central bankers from Europe to Japan committed to more quantitative easing. In fact, Yellen’s counterpart, Mario Draghi, chief of the European Central Bank (ECB) just went all in … again, launching QE Euro style. The ECB has promised to buy up to $1.3 trillion worth of European corporate and government bonds.
Expect other global central banks to pick up the slack where Fed QE leaves off.
Third, just because the Fed is no longer committing newly printed money to bond purchases, it remains a very active participant in the markets. The Fed balance sheet is bloated with $4.5 trillion worth of bonds purchased in multiple rounds of QE.
And the Fed has pledged to keep holding these securities on its balance sheet — for years if necessary — while continuing to reinvest proceeds of maturing bonds.
In fact, Janet Yellen is on record saying it “could take to the end of the decade” before the Fed reduces its bloated balance sheet. Expect this to help keep a lid on interest rates and continue to stimulate the economy, not to mention financial markets.
Bottom line: The monetary world hasn’t changed all that much just because QE3 is over. The Fed, and other major central banks, still maintain extremely easy monetary policies the world over, and won’t hesitate to do more if they think it’s necessary.
The Gift That Keeps Giving Upward Momentum to Stocks
As Bloomberg columnist Jeff Kearns recently quipped: “Quantitative easing may turn out to be a gift that keeps on giving for the U.S. economy.” The consequences of the Fed’s multi-trillion dollar bet will continue to influence markets long after QE3 is forgotten. As a result, fears of another sudden stock market selloff post-QE are likely overblown.
And as I pointed out recently, stocks have just entered the seasonal sweet-spot, making this time of year the best to be a buyer of select stocks. According to my friend Jeff Hirsch, editor of the Stock Trader’s Almanac: “Historically speaking, we can expect a solid market advance between now and sometime in the second quarter of 2015. However, as we have witnessed in recent weeks the market is still susceptible to brisk declines.”
In fact, based on average stock market returns dating back almost a century, the S&P 500 could gain 19.6 percent over the next six to nine months, and that’s just the average return. Frequently the seasonal gains have been even better than this!
With that in mind, the advice from my last Money and Markets column still stands: “This correction should result in a wonderful buying opportunity for a year-end rally … that may continue well into 2015!”
But I want your views. Should stock investors be worried about the end of QE? Or are you ready and waiting to take advantage of a year-end buying opportunity? It’s your turn to sound off; let me know your thoughts by commenting here!