How to Play the Fed’s Taper Plans?
No doubt, equities benefit from QE and the gradual withdrawal could have an impact. However, rising bond yields lower the relative attractiveness of equities. While it is hard to separate the effects of QE on the recent bull market from other stimulus efforts, a 2014 Fed Research found that a reduction of 0.25% in 10-year Treasury Yields increases stock prices by 7%. The planned tapering will steadily increase yields and exert pressure on equities.
On the other hand, the benefits from the fiscal policy adopted during the pandemic have already begun to wear off. Despite this, market sentiment remains intact and equities remain elevated.
Markets can take solace in the fact that the Fed will only taper its QE purchases to the extent that it is not detrimental to the economy. Thus far, the central bank has exhibited credibility and markets are likely to trust its guidance.