Aug 18, 2013 Stock markets will be in for a wild ride, up, down and sideways!

by 5i Research

One of these days, one of these weeks, one of these months, one of these years, the U.S. Fed will pull the plug on its economic-stimulus/quantitative-easing/bond-buyback program. That isn’t exactly news, is it? When that day comes, as it must, it will be a dog-bites-man kind of day – and the world will continue to spin on its axis and the sun will continue to rise in the east. Or so we hope!
 
For those among us with a vested and immediate interest in the performance of the equities markets, we can safely assume that the early days of the Fed’s reversal will likely be greeted with a stock-price and market slide. Let’s face it – it has been the Fed’s QE program that has greased the wheels of the stock markets for years, leading to lovely stock-price performance (especially in the U.S.) over the past half-decade or so. So, yes, when the Fed takes the QE punch bowl from the party, the cops will show up at the door and toss global stock markets into the hoosegow, not necessarily long-term, but certainly for the short, the equivalent, perhaps, of an overnight lockup for public intoxication.
 
Then, the 24-hour news cycle will spin into overdrive. Five years or so of unprecedented government economic backstopping will have come to an end. Five years of easy, low-interest money will be close to the end of their run – and the stage will start to be set for higher, more normalized rates. And a case could be made that the Canadian big-city housing market could find itself in some minor jeopardy because all of a sudden, an entire generation of young buyers will discover what their parents have always known – that you don’t really want to be carrying a $300,000 (or higher) housing debt if interest rates start racheting up into the five- or six-per-cent range, and perhaps beyond.
 
But, and this is a worthwhile but, higher interest rates and an end to the Fed’s QE program do not necessarily sink all boats. The low rates that have taken the stock prices of insurance companies to the woodshed over the past few years (think Manulife, Sun Life etc.) will be replaced by the kinds of higher rates that are actually insurer-friendly. And if the housing market in this country doesn’t implode in the face of higher rates, you can make a respectable case for Canadian financials broadly as well because they will benefit from the wider “spread” that will be generated between what they are willing to pay you as a depositor and what they are able to charge you as a loan customer. 
 
And beyond that, if the U.S. economy performs strongly, Canadian banks such as TD Canada Trust and the Royal, to cite two examples, will find themselves sitting in a broadly based sweet spot because of their heightened and growing banking presence south of the border.
 
So, when the QE party finally shows signs of coming to an end, don’t just sit there because life in the stock markets will not be business as usual. You’ll want to put on your analytical cap (perhaps with the assistance of your kindly financial advisor) and you’ll want to think in terms of potential winners and potential losers – and then tweak your equities holdings accordingly.
 
It is, after all, your hard-earned money at stake – and, in all likelihood, it will not be the right time to just lie back and be passive. But there is also this: QE will not come to an end – and interest rates won’t rise significantly – until the U.S. Fed and governments the world over are convinced that the global economy can stand on its own two feet without the crutch of public money propping it up. 
 
In the long run, a properly functional global economy has to be seen as a good thing. Short term? The guess here is that stock markets will be in for a wild ride, up, down and sideways!

 

 

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