Market Snapshot: The wild card that could sink stocks: What investors need to know as the Fed unwinds liquidity that had helped fuel market gains

by | Sep 10, 2022 | Stock Market

Quantitative monetary easing is credited for juicing stock market returns and boosting other speculative asset values by flooding markets with liquidity as the Federal Reserve snapped up trillions of dollars in bonds during both the 2008 financial crisis and the 2020 coronavirus pandemic in particular. Investors and policy makers may be underestimating what happens as the tide goes out. “I don’t know if the Fed or anybody else truly understands the impact of QT just yet,” said Aidan Garrib, head of global macro strategy and research at Montreal-based PGM Global, in a phone interview.

The Fed, in fact, began slowly shrinking its balance sheet — a process known as quantitative tightening, or QT — earlier this year. Now it’s accelerating the process, as planned, and it’s making some market watchers nervous. A lack of historical experience around the process is raising the uncertainty level. Meanwhile, research that increasingly credits quantitative easing, or QE, with giving asset prices a lift logically points to the potential for QT to do the opposite. Since 2010, QE has explained about 50% of the movement in market price-to-earnings multiples, said Savita Subramanian, equity and quant strategist at Bank of America, in a …

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