Why is the prospect of the Fed acting to taper off its purchases of securities in its current Quantitative Easing (QE) program appear to be driving stock prices lower?
Keep in mind that even though the Fed's QE efforts is clearly responsible for keeping the U.S. economy out of recession following the second quarter of 2012, the reason the Fed believes it can begin taking its foot off the QE gas is because the U.S. economy would appear to be beginning to recover from its microrecession.
As far as the economy is concerned, the Fed's tapering of its bond-buying through its QE program as the economy improves is really just maintaining a status quo. If the Fed's bond-buying has been successful in keeping real economic growth rates at a stable level, then as the economy gradually becomes capable of generating its own positive growth rate, it can offset what the Fed has been doing with its QE efforts, which means that the Fed can gradually ease off the gas.
And since the Fed's tapering policy is just maintaining the status quo for economic growth rates, stock prices should not be affected, because the portion of earnings that the businesses who make up the market could reasonably anticipate should likewise be unchanged in those conditions, simply because the rate of real economic growth is not expected to significantly change.
But that's not how prices really work. As we're about to show you, there hasn't really been any significant change in the future expectations for the sustainable portion of future earnings (aka "dividends"). And in fact, the only thing that has changed for investors is the point in the future to which serious and influential investors are focusing their attention in setting stock prices, which is being driven by the timing for when the Fed will begin tapering its QE programs.
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
Be the first to read Political Calculation's column. Sign up today and receive Townhall.com delivered each morning to your inbox.
(An important interview) Saving the Net from the surveillance state (And Crony Media): Glenn Greenwald speaks up (Q&A) | Nick Sorrentino