Since the occurrence of the credit crisis, Central banks have been immersing the global market with capital, and now this stimulus if officially over as we enter a new era of the global financial system.
If the added capital had done its job, then we need to accept the risks to the stock market in light of the upcoming stimulus’s end.
During the last few days, after a very crazy week on a macroeconomic scale, we have gotten news from both the U.S. Federal Open Market Committee and European Central Bank. Those central banks were fully responsible for the stimulus efforts, that both directly and indirectly drove the prices of stocks, bonds and real estate up. The stimulus began when the FOMC, who in 2012 said they wanted to increase asset prices through directly buying assets in the open market. Their goal was to push asset prices higher and they were successful in doing so.
Its hard to measure how successful their added capital was, however, in comparison to the 2013 stimulus we were able to see direct links to rise in the markets and the stimulus. If you aren’t certain the stimulus was the driving force behind assets rising higher then they would have been otherwise, you should take a close look at the FOMC stimulus program’s goals. Their objective was to push asset prices up and they achieved their goal.
On Thursday, the ECB made it known that during the last year, when the bank’s stimulus program was instituted there had been a 1.9% of GDP growth as well as 1.9% of inflation.
Yet, we aren’t sure whether this is a direct result of the stimulus or not. Neither the ECB, or the FOMC, told us how much assets increased as a direct result of the stimulus.
In actuality, we know the efforts of the central bank had an influence, and that asset prices did have a significant increase during the stimulus. The stimulus came to an official end during the first quarter of January 2018, but following the FOMC and ECB press conference this week, we no know this mutual effort will now become a thorn in our side with a material drain on liquidity. The FOMC told us that it will continue to reduce its balance sheet according to schedule, and the FOMC announced that it will end its bond-buying program in December. (Source: Marketwatch, “Don’t be a Bull in the headlights as central banks stop propping up stock markets”)
Changes are happening quickly and investors need to protect themselves. If stimulus policies gave a boost to asset prices then the opposite effect will occur when they are removed.
Bonds, stocks and real estate will be due to experience a significant repricing in the years ahead, with the stock market at its greatest period of risk. A 40% correlation in the S&P is possible, and we expect this number to be even higher in the Beta markets.
We advise proactive, risk-controlled investment strategies which can profit off of this risk period. It looks like “buy and hold” investing will be out of commission, at least for the next few years.