Cardinal Trading says investors should not wave goodbye to QE as there is a strong likelihood the Fed will be reviving the program in the future.
According to Cardinal Trading, the US Federal Reserve’s decision to end its bond-buying program may well have been priced into markets but the Tokyo-based investment house believes the central bank is not quite done with monetary stimulus yet.
Johannes Feinberg, chief economist at Cardinal Trading says, “The sentiment permeating the market is that QE is over and that it was effective but the truth of the matter is that it isn’t over and it wasn’t effective. QE1, failed so they launched QE2; QE2 failed so they launched QE3 and when the data starts to reflect a slowing economy, the highly-overvalued stock market tanks and dollar strength starts to put a crimp in exports, the Fed will return to the fray.”
The Fed must engineer an orderly exit from highly unorthodox monetary policies that have seen it hold interest rates at zero for 6 years, expand its balance sheet by $3.7 trillion and create distortions within the market for US Treasury bonds as it tried to keep long-term interest rates low in order to spur economic growth.
Recent US economic data has been sending the markets conflicting signals with consumer spending coming in significantly weaker but manufacturing improving.
Cardinal Trading says it has told clients to take profits on a raft of stocks reasoning that there is little in the way of justification for current high valuations.
“At least with QE, there was a lot of liquidity and cheap money floating around the markets but with a noticeable increase in earnings misses in the third quarter by some pretty big companies, it makes sense to take some risk off the table,” concluded Feinberg.
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