Eventually – and all market participants know this – the Federal Reserve will have to begin unwinding its massive, extraordinary support mechanisms known collectively as quantitative easing (QE). Established during the worst days of the Great Recession, QE – the purchase of assets designed to increase liquidity in a credit-strapped market – has come under fire due to allegations that it funnels money into the financial system without providing direct benefits to the rest of the economy. While a debate over the merits of QE in this regard is more than welcome, it stands to reason that the economic meltdown occurring in 2008 would have been a lot worse had it not been for TARP and subsequent relief efforts.
Looking ahead, it remains very much unclear how the market will handle a withdrawal – in both senses of the word – of the Fed. After years of flooding the system with cheap money, the U.S. central bank will have to stop guaranteeing super-low interest rates and allow the market itself to set borrowing costs. In the short term, this could be painful, although most likely not like the Volcker Fed days when rates jumped to nearly 20 percent. However, normalized rates of at least 5 percent should be expected.
A market correction will take place. Given the fact that some of the money from QE has found its way into stocks, it's only natural that investors will pull back as they wait and see just how diverse the wreck of a post-QE world will be. Yet barring a sovereign default in Europe or a serious debt-ceiling debacle in the United States, a correction should only be in the 15-20 percent range.
It won't be easy for every investor, which is why SmartStops – portfolio management tools that help hedge against market volatility – should be considered. Learn more by exploring our website or contact us directly today.
Categories: Risk Management, Trading & Portfolio Strategies