According to the six-month indicator, the S&P500 index had one of the best first six months ever. History tells us that it is usually followed by more gains. What about Quantitative Easing (QE) tapering?
Tomorrow, investors will find out what the Fed members discussed at the June FOMC meeting. The FOMC minutes to be released in the second half of tomorrow’s trading session are closely monitored by market participants to see if they confirm the hawkish message sent by the Fed.
If so, the chances increase that the Fed will announce the tapering of its asset purchases in August at the Jackson Hole Symposium. Central banks face the daunting task of quitting QE, as the process may lead to turbulence in the stock market.
Why keep QE in place when the economy adds 850k jobs/month, as seen in the previous NFP report? Money is so abundant that it is parked in the New York Fed’s reverse-repo facility, justifying the removal of stimulus.
But an end to QE may trigger a stock market correction. The US stock markets have outperformed other developed markets by a mile since the Great Financial Crisis of 2008-2009. QE programmes are to blame.
What’s in Store for US Equity Markets in Second Half of 2021?
A potential taper tantrum is supposed to scare investors. The “scare” lasted only for three days in June.
After the hawkish message from the Fed, investors sold equities, and the US dollar strengthened. While the dollar’s strength persisted, stocks reversed the losses and reached multiple new highs.
In fact, the S&P500 index had one of the best six months ever. If history offers any clues, the strength in the first six months of the year suggests more strength lies ahead.
Sure enough, inflows into global equity funds are the largest on record in the first half of the year. In fact, they dwarf anything seen so far this century.
Moving forward, central banks face a challenging task – tapering without hurting the market. The Bank of Canada already began cutting the pace of its bond-buying in April. Some other banks, like the Reserve Bank of Australia, are expected to do so, too, but because the US equity market indices outperform their peers, it is only the Fed’s decision that matters.