What Will You Do When the Fed's Easing Ends?
NEW YORK (TheStreet) -- The Federal Reserve announced another $10 billion reduction in asset purchases -- also known as quantitative easing, or QE -- last month, bringing total purchases down to $55 billion per month. Most investors are currently expecting the Fed to continue its tapering in the coming months and to completely wind down its latest round of quantitative easing by October of this year.
As for the market's reaction, investors still seem quite sanguine that the winddown will be orderly. The CBOE Volatility Index (VIX.X) is currently in the mid-teens, the equity put/call ratio is at the lower end of its historical range, and active managers in the National Association of Active Investment Managers continue to report high exposure levels to the market, as you can see in the chart below.
This complacency persists in spite of the fact that the S&P 500
Why are investors so optimistic? In a word: conditioning. They have been told in no uncertain terms not to "fight the Fed" and that the "Fed put" will be there should any declines ensue. It has been almost two years now since we have seen a 10% correction in the S&P 500, a long time to build up confidence in the Fed's ability to prevent declines. Additionally, since the beginning of 2013, every dip has been an easy dip to buy, with the S&P 500 running straight up to new highs once a short-term low is reached, as you'll see in the chart below. This pattern is a classic example of a positive feedback loop where investors have been continually rewarded for buying into any short-term weakness.
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