Market Reaction to Fed to Begin Tapering No Surprise. Just Proves “the Market Dislikes Uncertainty.”
Source Newsroom: Creighton University
Robert Johnson, Ph.D.,CFA, CAIA, is a professor of finance at Creighton University’s Heider College of Business and co-author of a forthcoming McGraw-Hill book, “Investing by the Fed.”
He can be reached at (434) 249-2805 or email RRJohnson@creighton.edu
The fact that the market reacted so positively to the news that the Fed will start tapering is not surprising at all according to Johnson. One of the most consistent truisms of the market is that “The Market Dislikes Uncertainty.” Much of the uncertainty was removed with the announcement and market participants can plan accordingly.
While short-term the markets reacted positively, Johnson believes that the long-term response will be much different. He has extensively researched the association between Fed policy and market returns and says the evidence is very consistent that markets perform markedly better when the Fed is pursuing an expansive monetary policy versus a restrictive monetary policy.
Johnson says over the most recent couple of years the Fed has infused an unprecedented amount of liquidity into the markets and we have witnessed terrific market performance. Investors and investment managers alike should lower their expectations for stock returns over the near term (one to two-year horizon).