Thursday, September 19, 2013
Quantitative Easing one year on
At the time I pointed out how bullish this was for the US stock market. In other posts I have explained that the real goal of the Fed's QE program was to raise asset prices and encourage expectations of a growing economy. You can see the effect of the Fed's program during the past year in the US stock market in the top chart.
Faster economic growth, the Fed's main goal, is always associated with higher, not lower, interest rates. So despite statements by the Fed that it is trying to lower long term interest rates it's real goal is to raise them by encouraging higher rates of economic growth in the US. The middle chart shows the daily yield on the US treasury 10 year note and you can see that the Fed is achieving this goal also.
All in all I rate the latest QE program a success for the Fed. I expect it to continue at least until the unemployment rate drops to 6.5% and until the Fed starts revising its forecasts of US economic growth rates upward instead of downward.
Just what this implies for the future path of US stock prices is a little more problematic. You have to remember that the market moves on surprises and unforeseen developments. So the question now is how much of the effect of the Fed's QE program has been priced into the market.
I think today's headline in the New York times gives us reason to worry that most of the positive effects of QE have been priced in. This headline lines up with the implications of the latest Time magazine cover which I discussed in this post.
The bottom line is that the S&P 500 is likely to move higher for a month or so. The 1775-1800 zone is my upside target. But after that I expect a sustained drop of more than 20% to start.