In the media, you’d hear, “The Fed will not unhinge itself from endless bond buying. This will be a permanent policy. Lower interest rates will lead to more liquidity, which will lead to more risk-taking.”
Some even said the stock market would be doomed to fail without continued QE.
Quantitative easing was implemented on three separate occasions. The Fed stood by their position, and now it’s obvious that they made the right choice.
The end of quantitative easing helped the stock market
When talk of tapering started to make the rounds in 2013, markets had a temporary fit. However, The Fed had done their job of averting a crisis. The economy had reached nearly full employment and stock prices were stable.
Tapering started in December 2013 and finished up October 2014, so it’s been nearly three years since quantitative easing ended. The SPX 500 in December 2013 was near 1800. In October 2014 it was still at 1800 (after a nasty selloff from highs around 2100). Note that the stock market remained stable.
Flash forward to 2017, and the SPX 500 is within a whisker of 2500.
Wait a minute. The SPX is near 2500 without quantitative easing, but when bond purchases ended, the index was 1800? We have a 39% return on the SPX 500 without QE? Ding, dong, the doomsayers were wrong.
It’s not just the SPX 500 enjoying a nice uptrend since QE ended. The Nasdaq composite is up 50%, and the FANG (Facebook, Amazon, Netflix, Google) stocks are up more than 200% (composite).
(While the Fed’s balance sheet is still at its zenith, there is now talk of distributing the bonds they currently hold. There is still an insatiable appetite for US bonds, so even if the Fed starts to shed its portfolio, we likely will not see much impact – unless we run into higher inflation.)
Even though the doomsday critics have been silenced, we still have constant market noise from people who won’t embrace what the market is actually doing. They still want to tell the market what to do, a strategy that has never worked. As this episode proves, follow the market clues and ignore the noise and endless chatter from the pundits. You will find yourself far ahead of the game.
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