November was a mixed month for stock markets, with a late-month selloff erasing early gains. Energy commodities were especially hard hit, as the U.S. crude oil benchmark declined 20%. The latest COVID variant to emerge, Omicron, spread fresh fear as several major economies increased restrictive measures.
Monetary policy, both in the U.S. and abroad, continued to slowly shift focus to inflation. Early in the month, the Federal Reserve announced a slowing of bond purchases, otherwise known as quantitative easing (QE) by $15 billion per month. The initial plan would reduce (taper) the $120 billion in total monthly bond purchases to $0 in eight months. Fed Chairman Jay Powell recently announced accelerating the taper pace will be a key point of discussion at upcoming Fed meetings.
The goal of QE is stronger economic growth. QE became a widely used tool by major central banks following the Great Financial Crisis. It involves central banks purchasing bonds on the open market to lower interest rates and increase liquidity. Quantitative tightening (QT) is the opposite of QE, with the goal of reducing monetary stimulus, to limit inflation. The below Deutsche Bank chart compares periods of QE vs the 10-year Treasury yield, Fed Funds (overnight) yield, and the S&P 500 index. QE is shown in green, tapering in yellow, QT in orange, and no Fed activity in white. The left axis applies to yields on the 10-year Treasury and Fed Funds. The right axis applies to the S&P 500 index. As you one can see, a discernible pattern is difficult to detect. Equity investors have been well rewarded throughout this period, while economic growth disappointed until the COVID reopening. The upcoming tapering cycle may look different than prior cycles, due to much higher inflation.
What is the conclusion from all the above? Markets and the economy don’t always react as they’re “supposed to”, as many other variables are always at play. Sorting out the winners from losers amid the upcoming changes in monetary policy continues to be a worthwhile endeavor by investors.
-Jared J. Ruxer, M.S.