The Fed has finally ended quantitative easing (QE) as economic data has shown much improvement, especially the labor market. Unemployment rate has fallen to 5.9%, its lowest ever since the recession started.
Huge Improvement on US Stock Market
QE was basically buying trillions of dollars’ worth of long term bonds in an effort to keep interest rates low. This is turn helped to stimulate the economy, improve the labor market, increase spending etc. The effect of course had been huge on the stock market. The S&P 500 index rose 10% to 30+% during each of the respective QE programs.
The end of QE is generally a positive sign for the economy as well, so the earnings of companies are likely to see even more improvements going forward.
Bond Yields to Start Getting Attractive
Bond yields have generally stayed low throughout QE, making them relatively unattractive compared to equities. Short term interest rates are likely to start increasing in 2015 as well, so as yields increase across the board, current bond prices will take a beating.
It has been difficult to get a balanced portfolio in the past few years due to relatively unattractive bond yields. So for investors without bond allocations, bond yields will finally start looking attractive enough to invest in.
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Increasing Borrowing Costs and Property Prices
As interest rates start to increase, borrowing costs will increase as well. Already weak current property prices will get negatively affected further. As the monthly repayments on loans increase, some property owners may find keeping their property unsustainable. Since rental is difficult to increase due to increasing supply as well, the only way to bring yields up is for prices to fall. It remains to be seen how the drastic the correction can be though.
It seems like QE program has helped US economy significantly. Given the state of the European economy, should they embark on their own QE program too? Compared to the US, the European stock market still remain at relatively attractive pricing levels. Who knows Europe might embark on their own QE program?