Beware of rising yields on reverse QE

(Aug 14): There has been quite a bit of talk and concern surrounding the US Federal Reserve’s rate hikes and their potential negative impact on equity markets. I believe these concerns are misplaced.

Instead, we need to be far more fearful of the imminent reversal of quantitative easing (QE) not just by the Fed but also the European Central Bank (ECB).

Take a look at the chart showing the fed funds rate and equity market performance. Between 2003 and 2008 (Phases A and B), the fed funds rate and the Dow Jones Industrial Average were positively correlated, that is, they moved in the same direction. They are affected by the same underlying factors, namely the health of the economy and corporate earnings growth.

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