The Effect of Quantitative Tightening (QT) on Stock Prices

There’s a theory called “Efficient Markets Theory.” It says that share prices reflect all information.

So if we know something is coming in the future, the current share price already reflects that. If there is a chance something is not going to happen that is expected to happen, the share price reflects the proper odds of it happening.

For instance, Elon Musk has offered to take Twitter private at $54.20 per share. (“420”, get it?) The board at Twitter has accepted his offer. The current price of Twitter stock is $38.29. If you think the sale is going ahead, this is 41% of free money. But the market does not think the sale is going to happen, and so the Efficient Markets Theory says that is reflected in the price.

So we know that the US Federal Reserve will start selling its short-term Treasury bills (T-bills) in 9 days, at around $30 billion per month. It will also sell mortgage-backed securities at $17.5 billion per month.

Some people are expecting further stock market losses when this starts. It’s one thing to stop buying government debt, but it’s another (apparently) to start actively selling it. I guess people think that there will be demand for buying this debt which will NOT go to the stock market.

But we know this. This was announced in January. The market has had 5 months to prepare for this day. How is this not “priced in”?

If Efficient Markets Theory is generally believed, how can traders’ also be “expecting” a market sell-off starting in 9 days? The sell-off has been happening for months. There is no new information that would lead to a sell-off.

The only new element is the lack of investment money flowing into stocks. But we already know that will happen, which should be reflected in the price.

I think the market will go up for a few days after QT starts, just from relief. Buy the rumor, sell the news. Or, in this case, the opposite. Sell the anticipation of QT, buy the QT starting…

We’ll see.