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The Fed’s Tapering: What It Could Mean For Amazon Stock

The Federal Reserve recently announced that it will slow down its asset purchases. So far, tech stocks have reacted well. Here is what the changes in monetary policy could mean for Amazon stock.

On Wednesday, November 3, the Federal Reserve announced that it will wind down its current $120 billion monthly asset purchase program. The US central bank will cut treasury and mortgage-backed security purchases by $10 billion and $5 billion per month, respectively. The strategy is largely aimed at containing rising consumer prices, now that the economy seems to have regained its footing.

Figure 1: Amazon Go store, in New York, NY.

Figure 1: Amazon Go store, in New York, NY.

Our sister channel Apple Maven has recently offered its take on the Fed’s announcement and its impact on Apple stock  (AAPL) - Get Free Report. Today, the Amazon Maven presents its opinion on what Amazon stock  (AMZN) - Get Free Report investors should expect in the face of changing monetary policy.

(Read more from the Amazon Maven: Amazon Stock: Overcoming Growth And Margin Woes)

Unwinding pandemic relief

At a high level, “tapering” is the process through which the Federal Reserve reduces its asset purchases with the intent of curbing liquidity injections in the economy. All else held equal, tapering usually has a negative impact on the stock market: the less money is put in circulation, the lower the economic activity, and the less shareholders have at their disposal to invest.

But so far, the markets have shrugged and marched forward, probably because tapering has been widely expected and properly priced into asset prices. The Nasdaq climbed 1% after the Fed’s announcement and moved higher from there.

(Read more from the Amazon Maven: How Amazon Stock Can Build Momentum Again)

Not the end of the bull market

According to Forbes, there are a few reasons why the Fed’s change in monetary policy will not stop the bull market. First, tapering has been clearly correlated with the strong performance of the S&P 500, as shown below. But the same has not happened in other countries (including Japan), which puts in question the quantitative easing bull thesis.

Figure 2: Fed balance sheet vs. S&P 500.

Figure 2: Fed balance sheet vs. S&P 500.

Second, the end of asset purchases could relieve pressure at the longer end of the yield curve, which could make lending more appealing – hence a positive for the economy and stocks. Lastly, history does not support the idea that tapering has led to higher yields, which many believe could bring an end to the party in the stock market. See chart below.

Figure 3: Treasury yields fell during the last QE taper.

Figure 3: Treasury yields fell during the last QE taper.

How AMZN could be impacted

For some of the macro-level reasons mentioned above, tapering may not have an overwhelmingly negative impact on the stock market – and, by association, on AMZN. Therefore, we restate our bullish position, as Amazon stock still appears to be attractive.

Despite Amazon having reported mixed-bag results in the last couple of quarters, investing in the e-commerce giant still seems to make sense for the long term. Now trading around 6% off its peak, AMZN presents a 14% upside opportunity, according to analysts tracked by TipRanks, which we believe to be a reasonable twelve-month target.

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With the Federal Reserve’s asset purchases beginning to unwind and short-term interest rates possibly rising in 2022, do you think Amazon stock stands to benefit from the change in monetary policy?

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)