Market Beat: Yellen announces end of quantitative easing
November 3, 2014
Last week at the FOMC meeting, Janet Yellen announced the end of QE (quantitative easing), citing a stronger US economy.
In this last round of QE, known as QE3, the Fed purchased about $1.6 trillion in bonds, and the size of its balance sheet increased from about $3 trillion to $4.5 trillion. QE3 is over, but that doesn't necessarily mean that we've seen the end of QE forever, as the Fed could easily begin another round of QE if economic conditions warrant it.
Now that the bond buying is over with, the next question is when will the Fed begin raising interest rates? Yellen, like her predecessor, Ben Bernanke, has repeatedly stated that the timing of interest rate hikes will be driven by economic data, focusing on the labor market, GDP and inflation.
GDP for the third quarter just came in at an annualized rate of 3.5 percent, and that is following a rate of 4.6 percent in Q2, a strong rate of growth for a mature economy. Consumer confidence is at the highest level in seven years, as consumers have been helped by falling gasoline prices and lower interest rates.
Every penny saved at the pump frees up $1 billion per year to be spent elsewhere in the economy. Debt service payments for consumers are also at a very low level. In Q2 they were at 9.91 percent of disposable income; at its peak in 2007, this ratio hit 13.2 percent.
Debt/equity ratios are also quite low for the non-financial corporate sector. In Q2 this ratio stood at 33 percent, down from a peak of 73 percent during the recession. The debt service ratio is at 10 percent, near where it was back in 1970. It looks like both the consumer and the corporate sector have quite a bit of room to leverage at current interest rates.
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Right now, we are more than halfway through corporate earnings season and the results have been fairly strong. All 10 S&P sectors have been showing profit improvements, and overall growth has risen to 11.4 percent.
The best sectors so far have been Health Care and Consumer Discretionary. The Health Care sector has been led by Biotechnology, which has seen an increase of over 45 percent.
The US economy appears to be fairly solid and corporate earnings have been strong. So far, the stock market has reacted favorably to the end of QE.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.