Tom’s Roundup: Is QE Back?

Market Commentary by Thomas C. O’Neill, VP Investments, O'Neill Wealth Management, Raymond James

Yes.

What is QE?

QE is quantitative easing, which means the Federal Reserve buys treasuries, providing cash to the US financial systems.

Liquidity to the US financial system is the fuel that helps the stock market rise. Since the financial crisis, there has been a direct correlation between quantitative easing (QE) and the rise of the stock market.

The European Central Bank has also indicated that they will start their quantitative easing program within the next few months. There are many central banks lowering interest rates around the globe, including the US, Europe, India, and Norway.

Rule of Thumb:

When the Fed is buying treasuries, the stock market rises. When it stops, or sells treasuries (quantitative tightening), the stock market falls, like it did in 2018.

The Positive and Negative

The liquidity being provided to the financial systems is a positive back drop for equities going forward. The negative issues facing the stock market are trade issues with China, and that corporate earnings are flat to slightly declining. However, any corrections should be well contained with the Fed in QE mode.

Economic and Market Data from Raymond James Chief Investment Officer, Larry Adam

·        2019 US GDP estimate is 2.2%

·        The current economic expansion at 124 months is the longest on record

·        Recessions are rare in the 3rd and 4th year of a presidential term

·        Business fixed investment declined in the 2nd quarter for the first time in 5 years due to concerns of global growth. Examples of fixed investments are: machinery, software, technology, equipment

·        $17 trillion dollars is the value of global negative-yielding debt. Note: This keeps US interest rates low in the bond market, which helps borrowers, especially in the housing market

·        Raymond James year-end target for S&P 500 is 3,053.

·        The five bull market checklist items, which include economy, valuations, corporate activity, seasonality, and sentiment are all leaning to the bullish end of the scale. Seasonality is supportive going into the 4th quarter.

·        Over the last 30 years, the 4th quarter has been positive 80% of the time, with an average return of 4.8%.

·        The 4th year of a presidential cycle has historically been positive for the S&P up 91% of the time, regardless of which party is in office.