LPL Financial Director of Research Marc Zabicki takes a look at why it’s important that the Federal Reserve must manage its policy wind down without upsetting markets or the economy.

LPL Research believes that over the last 12 years, investors have looked to the Fed to support risky asset prices. However, this gets tricky when central banks want to take back the policy foundations that have supported those asset prices. Since the Fed is expected to raise rates and roll down its quantitative easing program this year, 2022 might be a test for this.

While leverage in the U.S. economy is at an all-time high, bank capital ratios are better off than they were in the financial crisis. As a result, banks might have more room to soak up any debt shortfall without overly exposing their balance sheets.  This could be a big contributor to market confidence. LPL Research believes a different direction for Fed policy could put pressure on risky asset prices. However, relatively strong corporate fundamentals, earnings growth, and stable household balance sheets, could help support stocks. 

Our view is that 2022 will likely be more difficult than 2021. Investors will want to ensure that asset allocations are well-balanced and buffers against risky asset price volatility are well-placed. LPL Research thinks that the Fed will be a big factor in 2022, and central bankers’ ability to pull a combination without derailing sentiment will be crucial to keeping a floor under equity valuations. 


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth in the podcast may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Quantitative Easing (QE) refers to the Federal Reserve’s (Fed) current and/or past programs whereby the Fed purchases a set amount of Treasury and/or Mortgage-Backed securities each month from banks. This inserts more money in the economy (known as easing), which is intended to encourage economic growth.

All index data is from FactSet.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC. 


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