The 2008-09 financial crisis was certainly not a pleasant memory that’s why the Federal Reserve introduced the Quantitative Easing program in 2008 to stave off a collapse of the global financial system. It cut interest rates to a record-low for a couple of years as well. Chan & Naylor Accountants Australia talk about how a new and powerful driver can be a source of bull market.
The Federal Government bought U.S. Treasuries and government-sponsored mortgage back securities and ballooned its balance to $4.5 trillion. It has stopped buying bonds and keeps shrinking its balance sheet to normalize its monetary policy by running or selling off $10 billion a month in bonds, aiming to increase that amount to $50 billion a month starting October 2019.
Recently, the Federal Reserve has also raised the Federal Funds rate by 25 bps to 1.75%, expecting to raise it even more soon. There could be an imminent doom for the stock market because of the lack of quantitative easing and zero interest rates but more so because the Federal Balance Sheet is not shrinking enough. It is selling bonds but also earning lots of interest, even reportedly transferring $80.2 billion in earnings to the U.S. Treasury last year. It earned $114 billion in interest and $1.9 billion in foreign currency gains.
Quantitative Easing caused plenty of gains in the nine-year bull market but Trump tax cuts have generated stock buybacks that push stock prices higher. Corporate America repatriates billions of dollars from overseas and uses those with tax savings to buy back tons of its own stock. There have been $205 billion of buybacks in 2018 from S&P 500 and it is expected to reach $650 billion at the end of the year. Aside from that, Apple has also announced its $100 billion stock buyback just recently.
In the last 10 years, mutual funds and Exchange-Traded Funds only bought $1.6 trillion worth of U.S. equities. This means Corporate America stock buybacks is now a powerful source of bull market. Your stock market worries may be founded but the Federal Reserve may be the least of your concerns.
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