We don’t know enough about banking-system mechanics to conclude if the Fed’s balance-sheet increase associated with March’s bank bailout constitutes a new round of QE. But if it is, we’re skeptical equity investors should celebrate it. In fact, those running Small-Cap portfolios should probably fear it!
Senator Rand Paul’s annual “Festivus” report on wasteful spending makes for sobering reading to the dwindling few who care about federal finances. The “low light” for 2021 was a $465,000 grant to the National Institute of Health for a study of pigeons playing slot machines.
The extra months of QE “auto-pilot” failed to support some of the themes we’d have thought were the most likely to benefit from it—including IPOs, SPACs, Bitcoin, and the sky-high growers favored by the ARK Innovation ETF. Instead, the smart play with each of these assets was to ignore the ever-expanding Fed balance sheet and sell in February.
We considered the launch of the QE tapering program in January 2014 as the formal onset of the Fed’s tightening campaign, and that view seemed to be on the mark when High Yield bonds, and then stocks, unraveled over the next couple of years—although the final losses in the DJIA and S&P 500 fell short of what we expected.
One never appreciates what he or she has until it’s gone. In our case, during the many years it was freely available, we failed to appreciate the zero interest rate. Now that it’s gone, we already feel pressured to join a game where we (and very few others) have any edge: Fed-watching. Our real edge is that we recognize this.
Over the last eight years, policymakers around the world have held interest rates at unimaginably low levels, run persistently large fiscal deficits, and (in some cases) engaged in outright money-printing via quantitative easing programs.
Five springs ago, we couldn’t have imagined we’d still hold near-maximum equity exposure after a near-tripling in the stock market from its Great Recession low. Then again, we wouldn’t have guessed that Fed printing presses would still be whirring so many years after the crisis ended. Coincidence? Probably not.
We looked at the periods around the end of the three previous easing programs (QE1, QE2 and Operation Twist) and compared those patterns with the current ones for various measures. The current patterns from both an economic and a market front bear enough resemblance to the previous ones to make us a bit uncomfortable. February’s market action was encouraging, but it is still too early to rule out a post-QE fizzle.
The new debate over the QE “taper” erupted at the same time that a long-reliable Fed-tracking tool is telling us it’s time to ease.