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  1. Home
  2. / Investing
  3. / Financial Services

The Critics of Quantitative Easing Were Wrong

You must follow the markets, not the pundits.
By BOB LANG
Jul 24, 2017 | 08:00 AM EDT
Stocks quotes in this article: FB, AMZN, NFLX, GOOGL

Many cynics about the quantitative easing (QE) program could not wait to pounce on its negatives. When the Fed implemented a few of these programs following the worst financial crisis since the Great Depression, many in the markets were dumbfounded. They ridiculed the Fed for shoring up the banks and thus the stock market, not only bringing rates down to zero, but juicing up the bond market by adding what seemed to be unlimited bond purchases to their portfolio.

Many scoffed at this irregular behavior; yet more than eight years later, the markets and economy have fully recovered from a potentially disastrous outcome. Ben Bernanke, Janet Yellen, Henry Paulson, Tim Geithner and others went to the edge of the cliff, looked down and saw what was about to happen. They stepped in and pulled not only the U.S. but the world economy away from the brink. I don't care what anyone says, they did the right thing -- and in hindsight, that looks pretty good.

When the QE program was implemented on three separate occasions, the notion from the cynics out there was QE forever. They believed that the Fed could not unhinge itself from endless buying of bonds, that the policymakers would continue this method as a permanent policy. That was always wrong, of course, but the Fed, in their ultimate wisdom preferred not to put an end date until they were ready for it.

Further, many blamed the Fed for goosing the stock market via these bond purchases and extraordinarily low rates, making liquidity plentiful and risk-taking more in vogue. They said the stock market would be doomed to fail without continued easing. Let's see how that has turned out so far.

When the talk of tapering started to make the rounds, markets had a fit, but that was only temporary. At the margin, the Fed had done their job of averting a continued crisis, reaching full employment (nearly at the time) and price stability. The tapering started in December 2013 and finished in October 2014, so it's been nearly three years since that activity ended. In December 2013 (when taper started) the S&P 500 was near 1800; around October 2014 it stood near 1800, after a nasty selloff from highs around 2100.

Fast forward to 2017, where the S&P 500 is within a whisker of 2500. While the Fed's balance sheet is still at its zenith, there is now talk of reducing the balance sheet and distributing the bonds they currently hold into the marketplace. There is still an insatiable appetite for U.S. bonds, and even if the Fed starts to shed their portfolio along with new supply from Treasury, we should not see too much impact on the longer end of the curve unless higher inflation is seen.

But back to the markets. The S&P 500 is near 2500 without QE in 2017, but when the bond purchases ended the index was 1800? Wait a minute: That is a 39% return on the S&P 500 without the QE. I thought we were told the markets would be doomed without QE forever? Those predictions of course were completely wrong, and now they are all but forgotten because of it. Was anyone looking at the possibility back in 2014?

Those loud complaints of cynics have now been silenced, but I'm quite certain other complaints, excuses or "reasons" for the stock market rising are being fleshed out. Just constant noise from the crowd who won't embrace what the market is actually doing, rather than telling the market what it should be doing.

To repeat the facts with emphasis: The S&P 500 is up 39% since tapering QE ended. The Nasdaq composite is up 50%. As an example, FANG stocks -- Action Alerts PLUS holding Facebook (FB) , Trifecta Stocks name Amazon (AMZN) , Netflix (NFLX) and Google parent Alphabet (GOOGL) -- are up more than 200% (composite) since the tapering ended.

You think anyone would step up today and admit they were totally off-base about being critical of ending QE just a few short years ago? Not a chance. The markets told a different story.

To conclude: if we just follow the market clues and not the noise/chatter from the pundits and so-called experts, we find ourselves with a better chance to gain ground.

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At the time of publication, Bob Lang had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Rates and Bonds | Markets | Financial Services | Fixed income | Economy | Interest Rates | How-to | Stocks

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