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What is Quantitative Easing, and How Could Its Ending Affect You and Your Portfolio?

Quantitative easing is the electronic equivalent of firing up the Fed’s printing presses to create money for buying financial assets in the market, which in this case are long-term U.S. Treasury bonds. The Fed had pledged to buy $600 billion worth of treasury bonds, in an effort to keep interest rates low and help spur economic growth and lending.

There is disagreement in the economic community as to whether QE2 worked. Fans of quantitative easing say the U.S. economy is better off because of the program, while inflation hawks say it has propped up asset prices across the board, and that the markets will react now that it has ended.

Here are some scenarios which could play out, post-QE2:

Bond yields could continue to rise. With QE2 in place, treasury yields started to move lower, albeit slowly. On average, the Federal Reserve has been buying about $75 billion in bonds a month since last November. Now that it has come to an end, it is unlikely there will be a QE3.

Stock prices could take a hit. Since November, the S&P 500 has risen about 6 percent. Financial assets become more valuable when interest rates are low – while conversely, when interest rates are high, they are not so valuable. If investors are worried that yields are now going to start heading up, that could be a negative for the stock market. As a rule, higher yields are associated with an economic recovery, but a sudden jump could negatively impact stocks. Some say the stock market has already factored in the effect of the end of QE2, and that stocks are poised for higher gains.

Rally in commodities slows. The prices of commodities have seen a benefit from the quantitative easing program, with gold and silver continuing to perform well.

The professionals at WealthTrust Arizona have been watching the QE2 program for months, and carefully analyzing the situation. “QE2 ending does open the door for higher interest rates but it doesn’t mean that the economy is actually ready to walk through the door,” says Brent McQuiston, a Vice President and Senior Financial Advisor with WealthTrust Arizona, who added, “As a result, it is not time to panic but it is time to pay attention to how well a portfolio can withstand different scenarios.  Those who panic and sell each time the markets get a little scary typically experience poor investment returns.”

McQuiston concludes that savvy investors shouldn’t necessarily be concerned with what happens after QE2, saying, “We have found that a well-thought-out portfolio strategy that is diversified within and across global asset classes is the secret to winning over full market cycles.”

 

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