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QE tapering will not cause stock market crash

TradingPub Admin | July 25, 2013

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If you want some free stock trading education, it is important to know that while there have been dire predictions about how tapering quantitative easing will cause global asset markets to crash, the stock market will not experience these sharp declines due to this stimulus being pulled.

Many market experts have warned that assets across the world are trading at artificially high levels as a result of the robust bond purchases made by the Federal Reserve. Bob Janjuah, a highly-visible strategist for Nomura, has taken such a stance, Business Insider reports.

Global asset bubble
He wrote in a recent note that the central bank will reduce its existing stimulus since it has already created a bubble in asset prices and does not want to push these securities any higher than it has already, according to the news source.

The market expert has asserted that the impact that this QE has on asset values is so profound, that it will play a more important role in the future stimulus decisions of the Federal Reserve than unemployment and inflation, the media outlet reports.

Pending bear market
Janjuah has stated that the stock market is on track for a sharp correction - that would involve a decline of between 25 and 50 percent - either later on this year or near the start of 2013, according to CNBC. It is important to note that he has made some accurate predictions in the past, as he estimated that the global stock markets would rise to new all-time highs this year.

He said that such appreciation would happen in an environment of "dangerously loose global central bank policy settings, increasing complacency towards risk and blind faith in central bank 'puts' amongst investors," the media outlet reports.

The market expert has predicted that the plunge will likely happen as global investors account for asset values that have risen too far and realizations of lackluster economic growth.

Importance of U.S. market
One factor that has been cited repeatedly as being a major driver of the stock market is the strength of the U.S. economy. There are numerous examples of experts attributing rising equity prices to data indicating strength in the American economy, but a recent one was stocks moving higher on July 22 as investors responded to strong earnings and a slight dip in existing home sales, according to Bloomberg News.

The Federal Reserve has noted the importance of U.S. economic data in its decisions, stating that this will provide any impetus needed to change the pace of QE, Bloomberg reports.

Bruce McCain, who contributes to the management of more than $20 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland, told the news source in an interview that recently, economic reports have been tepid.

"We are kind of stuck in that middle ground where data is not bad enough to be encouraging about more quantitative easing, but it's not good enough to convince people that there is enough there fundamentally to justify sharply higher prices," he told the media outlet.

In the event that McCain is accurate in his statement that reducing QE will require a significant improvement in the state of U.S. economy, then this stimulus will not be pulled unless there is robust data to motivate such an action.

Equity market support
If the nation's economy must improve significantly for the bond purchases to be reduced, then the needed progress in the leading indicators will hopefully have a significant impact on the sentiment of global market participants. The boost that this economic strength should create for equities should help to make up for any detriment created by tapering QE.

While there could easily be come correction in stocks going forward, the sharp crash predicted by some will not likely happen.