Why Stimulus Tapering Is Good for Equity Investors
The U.
S.
Federal Reserve finally decided to taper its latest quantitative easing stimulus program (QE3) in January 2014 by reducing its bond purchase program to $75 billion per month, down from $85 billion per month that started in September 2012.
Moreover, it also announced that it will maintain its overnight rate near zero even if the unemployment rate falls below 6.
5% and especially if the inflation rate remains below target.
QE3 was created to stimulate the U.
S.
economy in response to the slow economic recovery from the 2008 financial crisis.
The Fed manages its QE3 stimulus by creating a substantial amount of money out of thin air-by printing money-and purchasing $85 billion worth of bonds--mortgage-backed securities and treasuries--each month.
This is done in an attempt to pump more money into the economy and to lower the long-term interest rates.
The program does not have an end date, but the Fed will taper it gradually when it sees substantial improvements in the U.
S.
economy, the inflation rate, and the unemployment rate.
As a result, the central bank currently owns approximately $4 trillion in bonds, which were purchased through printed money.
While some people believe that it is too early for the Fed to taper, we believe that it is better to start tapering earlier than postponing it.
This is because the U.
S.
economy has been on stimulus-steroids for a long time, the Fed has been printing an enormous amount of money to support its stimulus program, and its current near-zero federal funds rate should be sufficient to support economic recovery and growth.
The last thing many of us would want is high inflation and an asset price bubble (e.
g.
government bonds bubble).
We believe that the tapering of QE3 will benefit equity investors who invest in U.
S.
stocks.
This is because many institutional investors, fund managers and portfolio managers tend to shift more fixed income assets (e.
g.
corporate & government bonds) to equity investments (e.
g.
U.
S.
stocks) when they expect that interest rates will rise, which would cause bond prices to decline.
This happened in May of this year when bond yields increased substantially, which lead to a substantial decline in bond prices.
Many investors overreacted, sold their bond investments, and shifted their assets to equities, cash-equivalents, or other investments that are less sensitive to interest rates.
Having worked as a financial adviser in a bank, I experienced this situation first hand.
The U.
S.
Stock Market is largely controlled by Wall Street, including the largest fund managers, stock brokers, investment banks, hedge funds, stock traders and portfolio managers.
If a large number of them move their assets from fixed income investments to equities, the U.
S.
Stock Market as a whole would increase in price.
Since the Fed is planning to announce more tapering next year when it sees further improvement in the unemployment rate, we expect that more investors and fund managers will shift more of their assets to the equity market.
As a result, we believe that it will be another bull market in 2014 and that investors in U.
S.
stocks should benefit from it.
S.
Federal Reserve finally decided to taper its latest quantitative easing stimulus program (QE3) in January 2014 by reducing its bond purchase program to $75 billion per month, down from $85 billion per month that started in September 2012.
Moreover, it also announced that it will maintain its overnight rate near zero even if the unemployment rate falls below 6.
5% and especially if the inflation rate remains below target.
QE3 was created to stimulate the U.
S.
economy in response to the slow economic recovery from the 2008 financial crisis.
The Fed manages its QE3 stimulus by creating a substantial amount of money out of thin air-by printing money-and purchasing $85 billion worth of bonds--mortgage-backed securities and treasuries--each month.
This is done in an attempt to pump more money into the economy and to lower the long-term interest rates.
The program does not have an end date, but the Fed will taper it gradually when it sees substantial improvements in the U.
S.
economy, the inflation rate, and the unemployment rate.
As a result, the central bank currently owns approximately $4 trillion in bonds, which were purchased through printed money.
While some people believe that it is too early for the Fed to taper, we believe that it is better to start tapering earlier than postponing it.
This is because the U.
S.
economy has been on stimulus-steroids for a long time, the Fed has been printing an enormous amount of money to support its stimulus program, and its current near-zero federal funds rate should be sufficient to support economic recovery and growth.
The last thing many of us would want is high inflation and an asset price bubble (e.
g.
government bonds bubble).
We believe that the tapering of QE3 will benefit equity investors who invest in U.
S.
stocks.
This is because many institutional investors, fund managers and portfolio managers tend to shift more fixed income assets (e.
g.
corporate & government bonds) to equity investments (e.
g.
U.
S.
stocks) when they expect that interest rates will rise, which would cause bond prices to decline.
This happened in May of this year when bond yields increased substantially, which lead to a substantial decline in bond prices.
Many investors overreacted, sold their bond investments, and shifted their assets to equities, cash-equivalents, or other investments that are less sensitive to interest rates.
Having worked as a financial adviser in a bank, I experienced this situation first hand.
The U.
S.
Stock Market is largely controlled by Wall Street, including the largest fund managers, stock brokers, investment banks, hedge funds, stock traders and portfolio managers.
If a large number of them move their assets from fixed income investments to equities, the U.
S.
Stock Market as a whole would increase in price.
Since the Fed is planning to announce more tapering next year when it sees further improvement in the unemployment rate, we expect that more investors and fund managers will shift more of their assets to the equity market.
As a result, we believe that it will be another bull market in 2014 and that investors in U.
S.
stocks should benefit from it.
