The End of QE. Now What?
by Ryan Lewenza, CFA, CMT, Private Client Strategist, Raymond James
Ā§ Well, itās official. The US Federal Reserve (Fed) has finally removed the punch bowl from the liquidity party, by ending its asset purchases, also known as quantitative easing (QE), at its October 29th meeting.
Ā§ The Fed started QE3 in September 2012, with the Fed adding US$1.7 tln to its balance sheet over this period. This floodgate of liquidity has surely supported equities, as evidenced by the 0.97 correlation between the Fedās balance sheet and the S&P 500 Index (S&P 500). This tailwind for the equity markets now becomes a headwind.
Ā§ However, we believe the improving US economy and continued monetary stimulus provided by the Bank of Japan (BoJ) and European Central Bank (ECB), should be supportive to the global economic recovery and equity markets.
Ā§ Last week the BoJ announced that it was increasing the size of its asset purchase program from Ā„60 - Ā„70 tln to Ā„80 tln or roughly US$700 bln per year. Furthermore, the ECB is likely to follow suit by significantly increasing its balance sheet in the coming months, as the ECB attempts to stimulate the European economy.
Ā§ The key point is that while the Fed has ended its asset programs, many other key central banks are continuing to increase their programs, which will keep the global liquidity spigot wide open.
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