Quantitative Easing on Active vs Passive Debate
Hi everyone,
Forgive me if what I am about to write is factually incorrect. I am only a high schooler who is passionate about investing and finance.
I watched a documentary recently saying that after the financial crisis, the Federal Reserve started to buy a large number of government bonds and mortgage-backed securities. Since then, the Fed has only increased its so-called "Quantitative Easing, " resulting in inflated asset prices. As I have learned in my accounting class, the yield or the interest rates decrease as a result of the increased bond price. Markets generally react positively with lower interest rates.
Could the bull market we are experiencing be attributed to this quantitative easing? Or is my fundamental understanding wrong?
As I have learned, active funds generally perform better than passive funds in a bear market and vice versa in a bull market. So, my question is: Is the trend towards passive funds due to the result of this quantitative easing? And will it shift back to active funds when the next bear market hits?
I know this "Active vs Passive" debate has been covered ad nauseam on this forum, so sorry in advance if this has already been said
Is LO AM a dying career? I have heard mixed opinions on this so I am not really sure.
Based on the most helpful WSO content, here's what you need to know:
Quantitative Easing and Market Trends
Active vs Passive Funds
Future Shifts
LO Asset Management (AM) Career Outlook
For more detailed discussions and insights, you might want to explore the following threads on WSO: - Will asset management industry just wither away? - Associate positions at AMs will die off at an accelerated rate - Work at top AM -- AI will virtually kill off entry-level roles in AM over the next 5yrs
I'm sorry, but it looks like this may be out of my ability to answer... maybe some of the links above might help?
bump
You're a pretty smart high-schooler. You're correct on the inverse relationship between yield and price for bonds, but I usually think about it from the opposite chain of causality. The fed cuts interest rates (at some time in the future), investors will accept newly issued bonds with lower yields, the existing bonds that have higher yields become more attractive their price goes up. Read Fabozzi's fixed income securities for more info.
Quantitative easing definitely has an impact on asset prices and the economy in general. The fed was ending its recent foray into QE around June 2022 and beginning Quantitative Tightening, which was a pretty novel process. Rising interest rates did a number on fixed income, wall street is all hyped about the potential of interest rate cuts (expansionary monetary policy) in the coming months. You talked about bull vs bear markets, and if you mean equities the story there is a little more complicated. A lot of the equity valuation growth in the last year or so has been from mega cap tech companies (microsoft, meta, nvidia, etc) with the gains a little less diversified than some expected (people keep thinking value stocks will go up but growth stocks continue to kill it).
Active management will never totally disappear, obv hedgefunds do it to generate alpha but AM shops generally have active funds too, although its mostly passive these days you're right. Turns out alpha generation is hard and few managers can consistently do it. Passive management is cheaper for the customer (lower fees) and that's a big selling point for most retail investors. Neither will disappear, but the shift towards passive for the big AM shops is probably a durable change, not a cyclical thing. Hope all that helps, i'm no expert
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