Where have we been with quantitative easing? Quantitative easing was originally enacted in 2008 when the federal funds rate was reduced to nothing through its purchase of Mortgage-backed securities. The purchases reached its peak of $2.1 trillion in June 2010. Then, quantitative easing (QE2) was announced in November 2010, in which the Federal Reserve subsequently purchased $600 billion in Treasury securities. QE3 was then announced in September 2012, which was a program in which the Federal Reserve initiated to purchase $40 billion a month in mortgage-backed securities.
Now, why is this important?
The volume of the Federal Reserve's quantitative easing pinned interest rates down. This means that mortgage interest rates were held down, along with bank deposit rates. Since bonds and deposit rates became less attractive to investors, the stock market became a more attractive place to invest money.
How do we use this change in environment?
Gold miners will most likely be the best performing class of stocks through the remainder of the year because of how the dollar (in currency exchange markets) was manipulated upward. Also, the process of these stocks bottoming out in the past few weeks reminds me of how the broader stock market bottomed in late 2008/early 2009. The stock market does look high when you factor in valuations of many companies, but it is important to stay disciplined for your long term goals. While the market uptrend is still intact, it does look like it is in the 8th inning or so. One should realize that the market will likely continue going up as long as quantitative easing continues. Though, a reversal should occur sometime around the spigot shuts off. It is also interesting that many stocks that are considered good indicators of the economy have been missing earnings, which includes Walmart, McDonalds, and Microsoft.
One must also consider the accuracy of employment reports. The link http://www.bls.gov/news.release/empsit.t15.htm shows that unemployment is actually around 14%, not the 7.6% is commonly released.
What does this mean?
Should the Federal Reserve not change their minds and wind down quantitative easing, bonds will ultimately plummet in price, which increases their yield. Bank rates should increase, which means that it should become easier to earn a rate to break even with inflation. As quantitative easing has propped up the stock market and many companies now have overvalued stocks, the market should decline, or at best stagnate.
Businesses should continue to focus on serving a value-oriented consumer with this change as well. Investments should be made to innovate in an effort to attract new customers, and they should be analyzed carefully to determine the prospect of such investments driving business results.