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How to Invest in the QT Era

On CNBC, Billionaire investor David Tepper said that we are not in the money printing, quantitative easing anymore. Interest rates are higher in this environment. Therefore, markets cannot have stocks with the same high multiples as before.

Tepper’s Appaloosa Management purchased a six-month certificate of deposit, equivalent to a Guaranteed Investment Certificate in Canada. His fund also has large stakes in richly valued tech firms, including Nvidia (NVDA). Microsoft (MSFT) and Meta Platforms (META) are also large holdings.

The Fed is cutting money from the financial system through Quantitative Tightening. This has the equivalent effect of raising interest rates. Investors should brace for elevated risks of a market correction ahead. The higher rate environment decreases the attractiveness of risky assets. Investors may just as easily buy treasuries or CDs for 5% to 6% in risk-free returns. The market must return at least 5% in that time. Alternatively, securities need to have a potential return of above 5% in the longer term.

The Federal Reserve will eventually cut rates. That is a positive catalyst that raises the price of securities. Still, after Nasdaq and S&P 500 rallied, it potentially priced in a rate cut. In the last Fed policy meeting, Jerome Powell said that the Fed will not cut rates anytime soon.