How Tapering of Quantitative Easing Affects the Stock Market Movement

Quantitative easing (QE) has played increasingly more important roles in the financial marketplace and economic systems. It was first introduced by Japan. Nowadays, it has been used by central banks to inject liquidity into the economy and stimulate the economy. The Federal Reserve Bank first launched QE 1 in November 2008, and ended it in March 2010.  Then QE2 lasted from November 2010, to June 2011. 

QE3 was announced on September 13, 2012 to purchase $40 billion worth of mortgage-backed securities per month. On September 21, 2011, the Federal Open Market Committee (FOMC) announced the implementation of Operation Twist. Lastly, on December 12, 2012 the QE4 was declared to increase the bond purchasing amount from $40 billion to $85 billion. The Fed pledged to maintain the QE program until the labor market was improved significantly (6.5% unemployment rate as a benchmark). Thus, it is called QE Infinity.  The market had the best performance of the last 65 years since the QE was implemented in late 2008.

          Since the current Fed chairman Mr. Bernanke is going to step down in the end of January, 2014, his successor is gaining attention.  President Obama is going to appoint a new Fed chairman.  We are going to wait and see how the new Fed chairman’s money policy will impact the financial market and economy.

Supply and demand for products, coupled with currencies and other investments, create a push-pull dynamic in prices. Prices and rates change as supply or demand changes. If supply increases beyond current demand, prices will subsequently fall. If supply is relatively stable, prices will fluctuate higher and lower as demand increases or decreases.

This supply and demand rule is applicable to the stock market too.  When the QE ends, it means the demand for securities decreases too. The price of equities is expected to drop assuming the P/E ratio remains at similar levels.

Since May 2013, you can count how many trading days were dominated by the Fed officers’ voices regarding the QE tapering. Since the Fed officers expressed their own opinion, and delivered the mixed information to the market, the market fluctuated along their either hawkish or dovish tones constantly!  Especially on 8/6/2013, when two Fed officers expressed the possibility the stimulus would start from as early as September 2013, the global market was definitely shaken.

FOMC announced tapering of QE in December 2013. We will see how this policy change may affect the stock and housing market.

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