The Federal Reserve is likely to start tapering its bond purchases in March 2014, according to Toronto-based Manulife Asset Management, which is good news for U.S. equities.
In a report called “Global Intelligence: The Outlook for 2014,” Manulife’s chief economist, Bill Cheney, said U.S. unemployment numbers will likely hit 7% in the first quarter of 2014, which would signal the beginning of the end of quantitative easing (QE).
However, Cheney notes that the Fed will remain cautious about when exactly it slows down its bond purchases because of the market’s reaction to tapering rumours in May 2013. Said Cheney: “It all depends on the progress of the economy. Above all, the Fed doesn’t want to move too abruptly.”
If however, the U.S. continues to recovery as Manulife and the Federal Open Market Committee predict then QE could be a thing of the past by the end of next year. “The Fed will err on the side of growth in their decisions to ensure the economy is strong enough to withstand tapering,” said Cheney in the report. “We think we’ll reach the end of QE sometime in the third or fourth quarter of 2014.”
On the whole, the Fed’s decision to taper its bond purchases should be good news for U.S. equities, according to Manulife – provided short-term interest rates don’t spike – as it signals the U.S. economy as a whole is stable. “We see the Fed tapering as a longer-term positive for U.S. equities, signaling the patient is more healthy and is being taken off life support,” said Sandy Sanders, U.S. equities portfolio manager, in the report.
While good news for the U.S., tapering could be have a negative impact on the Canadian market, according to Manulife, because interest-rate sensitive securities will underperform and natural resource stocks will struggle due to a stronger greenback.