Q. How will the markets react to the end of QE?

A. My guess is we will begin pricing in the phasing -out of QE in the next 60-90 days, or roughly 60-90 days before the program is scheduled to end in June.

Equity markets have clearly enjoyed a tailwind from the flood of liquidity, prompting inflation in asset prices, a boost in the wealth-effect and a moderate pick-up in economic growth. Since markets are forward looking, I’d anticipate a slowdown in equity gains later this spring. The traditional “sell in May and go away” until November/December seems particularly apt this year.

Conventional wisdom would tell us that the dollar will strengthen once the Fed turns off the liquidity spigot. That makes perfect sense, but don’t forget, the dollar strengthened 11% from the day the Fed announced it was instituting QE2. Market are forward looking, so there is no guarantee that a firmer dollar will accompany an end to QE.

Same for commodities. The argument for owning commodities will be weakened by the end of QE, but markets don’t always cooperate.