Despite firming up on Thursday, the U.S. stock market remains fragile, coming off a six-day losing streak leaving many to wonder what will happen as the Fed’s quantitative easing program, known as QE2, wraps up.
Doug Cliggott of Credit Suisse worries stocks could fall another 10% in the weeks ahead.
“When the Fed stops buying assets at the margin we think we are going to get a reset in prices. We think equity prices will come down a bit more. We think maybe investment grade credit spreads will widen out. We think we might get some pressure on commodity prices. They might come down a bit more.”
And because the Fed’s action – essentially pumping money into the economy is unprecedented – the winding down of the program is creating uncertainty.
Charles Schwab’s Chief Investment Strategist, Liz Ann Sonders:
“We can’t look back and say what happened last time QE1 and QE2 ended in terms of yields and the stock market, so I think there has been a pocket of investors, consumers, businesses that have a tremendous amount of uncertainty about QE2 and I think it’s time that we get off this stimulus and actually see whether the economy has, can you know stand on its own legs. So I view the end of QE2 as a good thing, even if it’s causing some short term volatility and concerns.”
And those concerns may fade if the economy can successfully grow without stimulus, giving the bull market trend new legs.
Goldman Sachs’ Chief Investment Strategist, David Kostin sees about a 10% upside on the S&P by the end of the year.
“Our forecast is that the U.S. equity market, as measured by the S&P 500, will rise to around 1450 at the end of this year. So what are the drivers? There are three drivers: the first is the economy, the second is margins, and the third is some of the sector rotation that has taken place in the market. So from an economic point of view we are looking at around 3% annualized growth rate in a quarterly basis for the next seven quarters.”
The key to that optimism: getting past the uncertainty not only regarding QE2 but also on the budget deficit and new regulations.
Bottom line: Top investment strategists weigh in on the state of the market and what could happen when the Fed’s quantitative easing program ends. No clear consensus exists.