The argument that the market will trend down with QT is essentially this: what drove the market higher was the Fed’s program itself. The argument against is that while the initial QE program may have pushed markets higher, since then the growth of the two has been generally in line. Further, while some downward adjustment may be reasonable as the Fed reduces its balance sheet, this adjustment will be limited, just as it was in the 1990s through 2000s.
Also worth noting is that while the Fed is reducing its balance sheet, it won’t be taking the balance sheet back to 2005 levels. The economy has grown since then, and so has the reasonable balance sheet level. Similarly, even if there is an effect on markets, it will not be something that takes us back to levels of the mid-2000s.
A New Headwind?
Instead, I suspect this is just one more example of a market tailwind fading and possibly turning into a headwind. It is one more thing to worry about, but not too much. The fact that the Fed can—and is—normalizing may be an indicator that the fundamentals remain reasonably sound. Over time, that will have much more of an effect than the current QT program.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions.