Markets have tanked in May not because of the Doomsday prediction of Harold Camping. Rather, investors are scared of the 'Armageddon' on June 30, 2011 - the end of QE2.
The importance of QE2 on the financial markets cannot be emphasized enough.
The rally that started in March 2009 rode the liquidity tide of QE1. Then, from April to August 2010, investors bailed on the market as QE1 and fiscal stimulus measures faded.
The market then rebounded in September after the Federal Reserve hinted at QE2. In December, President Obama's tax compromise with the Republicans gave investors further confidence.
Fast forward to May 2011, investors are once again uneasy over the looming end of QE2 and have trimmed their holdings of risk assets.
The end of 2010's QE1 and 2011's QE2, however, have some differences.
In 2011, a positive factor is that the economy hasn't deteriorated in the months before the end of QE2 (with the notable exception of the housing market). A negative factor, however, is uncertainty over how the end of QE2 will affect Treasuries, a market into which QE2 will have propped up with $600 billion by June 30.
Some, like PIMCO's Bill Gross, are bearish over the Federal Reserve's exit and jumped ship weeks ago. He said QE2 has vastly distorted the price of Treasuries and made them too.
If Gross is right, when QE2 ends, Treasury yields should rise. The stock market, which many believe has gotten ahead of economic fundamentals, will then fall.
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