To appreciate just how much the Fed’s policies have been responsible for this pattern, consider how returns since March 2009 have depended on whether the Fed increased or decreased its monetary stimulus. When the Fed’s quantitative-easing programs were fully in force, junk handily won — turning in an average monthly gain of 5.6%, versus 3.4% for quality. During all other months, the average junk stock actually incurred a slight loss, versus a 0.7% monthly gain for the average quality stock.
This contrast offers a glimpse into how the stock market is likely to behave when the Fed finally does bring quantitative easing to an end and begins to increase interest rates. Not only will the market as a whole face stiffer headwinds, but previously highflying junk stocks could be big casualties. Banking stocks, and the financial sector generally, could be particularly hard hit."
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