Just as quantitative easing by the U.S. Federal Reserve has inadvertently increased the country’s wealth gap, so should tapering limit its rise.
Under the central bank’s program of pumping money into the economy, purchases of financial assets have enriched the 10 percent of Americans who hold four-fifths of the country’s stocks and bonds. With the Fed’s liquidity being withdrawn, the whole effect should be more muted. And absent such underpinning for equities, corporate executives will be much more likely to invest to improve returns. This should involve more hiring and a better outlook for those outside the top decile.
Since the start of quantitative easing (where the Fed created more money), the price investors were prepared to pay for corporate earnings rose from very low levels during the financial crisis to fair levels today.
As the Fed slowly withdraws, earnings growth, rather than the price paid for those earnings, should be the main driver of stock returns. With profits likely to increase at a higher single-digit rate, stocks should rise at the same rate as well. The big returns of 2013, and their huge effect on the net worth of the wealthy, are unlikely to repeat in the near term.