Opportunities in the Altered Investment Environment

The Federal Reserve's (Fed) ongoing quantitative easing (QE) policies have significantly altered the investment environment. QE essentially increases the money supply which allows interest rates to fall, encourages landing and borrowing, and stimulates consumers’ spending and economic growth. Since the Fed began quantitative easing measures, bond market volatility has been below average and stock market volatility has been on the rise.

There is no doubt that quantitative easing provides some benefit to a struggling economy. Yet, how much benefit it provides to the current state of the US economy remains to be seen. While quantitative easing programs can fuel the economy, these measures also can create some challenges such as increased inflation, higher debt, and slow international trade (quantitative easing weakens the importer’s currency which discourages exporters).

One of the best actions you can take in a low interest rates environment, is to pay off your high interest credit cards or pay off whatever debt you have.

The market volatility created by Fed’s QE can be seen as an environment full of opportunities by some investors, as forward returns have historically (at least since 1990) * proven to be strong for stocks. When volatility increases for stocks but remains low for bonds, equities usually perform above average other periods of time (on a 1-month forward, 3-month forward, and 6-month forward time frame). Some investors choose to get bullish on stocks during these periods of volatility known as “valuable volatility”.

Volatility could be returning to more normal levels, which can represent an opportunity for long-time investors with a systematic investing plan. A plan of regular investing can take the emotion out of investing and reduce the temptation to time the market.

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*Markets Insider, August 15, 2021