The Fed's Policy is evolving. What's going to happen to stocks?

Senior Analyst

Marketing Brew

It looks like President Biden will nominate the current Federal Reserve Chair, Jerome Powell, to a second term as Chair of the Board of Governors of the Federal Reserve System. While Biden's decision wasn't unexpected, a Powell-run fed signals continuity in the direction of our monetary policy. This could mean that if current conditions prevail, we will continue to see the tapering of quantitative easing and the eventual hike of interest rates. But, what does this nomination mean for stocks? While some analysts prophetize that removing monetary support from the Fed spells trouble for the market, history seems to show otherwise. Quantitative easing was first introduced in November of 2008. And while there isn't as much historical data as we typically analyze, we can draw some conclusions based on the available data. Brian Belski, the chief investment strategist for BMO Capital Markets, recently published that "There is no denying that quantitative easing periods have coincided with strong gains for U.S. stocks with the S&P 500 averaging a 19.6% annualized price return during all four of the Fed's Q.E. programs."

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Additionally, it's important to remember that rate hikes don't have to spell doom for stocks. It's easy to assume that all things being equal, higher rates are more bearish than bullish. However, historically, the market hasn't been as bearish as people thought when rates increase. Belski went on to write in his most recent report that "Yes, U.S. stocks have struggled in the initial three months after the Fed's first interest rate hike of the cycle with the S&P 500 logging a 1.9% average loss...However, the index has done fairly well thereafter, gaining 7.5%, on average." Even with Powell's second term appointment, the market seems poised for a lot more growth. As we've discussed over the last couple of weeks, Job openings are at historic highs, and business investment is at record levels. These elements are driving earnings growth. And earnings growth drives stock prices.

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