The Stock market is overpriced but keeps going up based on the earnings of a few high tech stocks. Now there has been a drop of a few percent and analysts are speculating that this may be the prelude to a stock market correction. The cause may be the Federal Reserve. The Fed has announced that it is going to keep raising interest rates slowly but surely but more importantly the Fed is going to sell the bonds that it accumulated during its Quantitative easing program and put the money back in the US treasury. This will mean taking $4.5 trillion out circulation. Our question is, will Quantitative Tapering cause the market to correct?
Is It Different This Time?
CNBC writes that the most recent drop in tech stocks may predict an overall market decline. They believe that it is more than just specific news about specific stocks that is driving high tech stocks down.
Hickey believes it is not just fundamental news driving the sector lower, but it could be a reaction to the Federal Reserve’s announcement Wednesday to roll off its $4.5 trillion balance sheet.
“When the QEs were announced by the Fed, stocks jumped across the board before the actual buying occurred. We may be seeing the reverse happen following Wednesday’s Fed meeting when they announced QT [quantitative tapering],” he wrote.
When the Fed sells its bonds and puts the money back in the treasury it will be like collecting that amount of money in circulation and sending it back to the government. It will be a deflationary move and could easily drive stock prices down.
Quantitative Easing Becomes Quantitative Tapering
Business Insider writes about the Fed’s plan to unwind financial crisis emergency measures and what that will mean.
As it responded to the US economic slowdown and housing crisis a decade ago, the Fed acquired treasuries and mortgage-backed securities to push down borrowing costs.
But with the economy back on its feet, this emergency measure the key part of what’s known as quantitative easing is no longer needed. The Fed began tapering its purchases in 2013 and now wants to actively get rid of the bonds it owns.
To do this, it won’t reinvest some of its bonds as they mature and that way, they’ll roll off its balance sheet. The amounts to start are $4 billion a month in mortgage securities and $6 billion in Treasuries. It would then raise these every quarter until they hit $20 billion and $30 billion.
As quantitative easing and resulting low interest rates increased investors’ appetite for risk so will quantitative tapering slowly but surely decrease risk appetite and have its toll on the stock market. The question is will quantitative tapering cause the market to correct in the next weeks, months or years? Smart investors and traders will look ahead and hedge their investing and trading to prepare for the quantitative tapering correction.
