An overcast summer for SPDR S&P 500 ETF Trust (NYSEARCA:SPY)?
In California, summer is one of the most welcomed seasons. But when it comes to the stock market, summer heralds volatility. The first risk indicators for the SPDR S&P 500 ETF (NYSEARCA:SPY), have been rearing their heads over the past month. This has been largely due to the fear of an economic downturn in case the Fed decides to throw a speed-breaker in front of its seemingly inexhaustible supply of quantitative easing. The dual edged sword of dropping stock prices and rising interest rates hangs swings dangerously above investors’ necks. At the moment, the economic environment is no more than a blimp that has been pumped with a large amount of cheap cash or euphemistically speaking, with quantitative easing to keep the economy floating high.
What is quantitative easing?
Generally, in times of recession or if the economy is very snail-paced, the Federal Reserve reduces short-term interest rates. This adds impetus to lending and spending. However, at the moment, the Fed has cut interest rates as much as they can but the economy is still crawling along. This is called the “zero bound” and the fed has reached its lowest limit.
In place of that the central bank can attempt quantitative easing. Since it is possible for the Federal Reserve to create dollars at the click of a finger, it also has the capacity to buy up assets such as mortgage-backed securities and long-term treasuries from commercial banks as well as other institutions. This shoots cash into the United States’ economy and brings long-term interest rates down, further. When long-term interest rates drop, investors are more inclined to spend money.
The right moves
In the current scenario, it wouldn’t really be wise to drop all your stock exposure and give up on the stock market. It’s important to understand which way the economy is heading and then strategize accordingly. That’s probably the smartest way of facing the summer stock heat. The street smart ETF investors are aware that this volatility can be channelized to suit their purposes by proactively shuffling their portfolio. That’s probably the only route to survival in the tumultuous times that are ahead.