Occidental countries maintain employment of quantitative easing (QE) programs to fend off another financial drop. To prevent fallout in asset prices, central banks have played an important role in reflating risk assets. A negative spiral down in the value of assets would be catastrophic. In recent board minutes, most Federal Reserve board members believe asset purchases should continue at least till the middle of 2013.
In the era of fiat currency, there is change in conviction in central banking in which remarkably low interest rates are the new normal.
Mega policy stimulus from global central banks has benefited equity markets at the expense of savers in fixed income. On April 10, 2013, the S&P 500 topped its 2007 trading record high, climbing to 1585.65. With that being said, how long will the U.S. equity market rally last? Is it sustainable? The linkages between quantitative easing policies and stock market movements are complex to say the least. Since the Federal Reserve is buying mortgage-backed securities (MBS) in relation to QE policy, essentially they are driving down mortgage rates. These mortgage rates have augmented housing market activity, coupled with investors buying foreclosures, pushing up the value of housing.
Mature public companies that are flush with cash on their balance sheets and pay dividends are likely contributing to the surge in U.S. equity markets. Dividend-paying companies provide alternative relief from corporate bonds.
In the long-run, the Federal Reserve will eventually exit their QE policies. Central banks and monetary authorities have been accelerating leverage risk to the future as large debt-to-GDP rations in old, developed economies will put severe strain on the world economy. Public funds are weary of this surge in equity prices. High volatility in the equity markets have been a turnoff for public investors, especially when allocated to active strategies.
S&P 500 Index