Quantitative Easing Is Over — What’s Next?

Last week, the Federal Reserve announced the end of the third leg of quantitative easing, or QE3.

QE3 lasted for over two years, with the Fed buying between $40 billion to $85 billion in mortgage-backed securities each month. This number was tapered to $25 billion in August.

The greatest ‘side effect’, so to speak, of quantitative easing has been a run-up in the stock market that has coincided with each phase. In the 2+ years of QE3, the Dow has broken its previous all-time high 40 times, most recently on October 31. Its current level of 17,390 is about 26% higher than it was at the start of QE3.

So what is to become of the market at the end of QE3? We looked back at phases 1 & 2 for some insight:

Quantitative Easing Phase 1

This was the original inception of the program, implemented in response to the financial crisis of 2008. Beginning in November of that year, QE lasted a total 16 months and saw the government purchase about $1.4 trillion in debt and mortgage-backed securities.

Effects on the Stock Market: Over the 16-month life of QE1, the Dow Jones Industrial Average (DJIA) grew a total of almost 2400 points, or 28%. This information is even more impressive when you consider the DJIA continued its decline for the first three months of the program—meaning over the last 13 months, the Dow grew a whopping 66%!

Aftermath: QE1 wrapped up on March 31, 2010, and by July 1 the Dow had sustained a 14% drop. Undeterred, the Fed announced that phase 2 of quantitative easing would begin that fall.

Quantitative Easing Phase 2

Beginning in November of 2010, the Fed announced this phase of quantitative easing would promote a more sustained economic recovery. It lasted only half as long as phase one—eight months—but added another $600 billion in securities purchases.

Effects on the Stock Market: It wasn’t as pronounced as phase one, but considering the shorter time period, investors did quite well for themselves during the eight-month duration of QE2. By the time the program wrapped up on June 30, 2011, the Dow was up about 12%.

Aftermath: Almost immediately, the bottom dropped out of the stock market. Within six weeks, the market had dropped 16% amidst fears about the national credit rating.

Quantitative Easing Phase 3

Phase 3 wouldn’t begin until September 2012, but it has been by far the longest, most sustained attempt to stimulate the U.S. economy. Originally, it was announced that monthly purchases would total $40 billion, but that number would ultimately grow as high as $85 billion per month.

Effects on the Stock Market: The Dow Jones Industrial Average set 40 all-time highs over the life of QE3, the latest (and highest) occurring on its final day, October 31, 2014, when it closed at 17,390. That’s a 28% increase in almost exactly two years.

So what will be the aftermath to the conclusion of QE3? Both of the first two phases saw immediate market corrections within 45-90 days. If that trend holds true a third time, are you prepared to sustain another loss on Wall Street?

Phil Cannella
Partnered with CBS Radio Network, Phil Cannella reports on the issues most important to the American retiree.
Phil Cannella
- 2 days ago
Phil Cannella

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