Economic Bubble?

My partner John Washington likes to say that trends last longer than anyone expects. Well, this week we got more evidence of that. For months and even years now, stocks have been fueled, in part, by the promise of unending liquidity injections by central banks across the globe. These liquidity injections have reduced interest rates to very low levels, thereby encouraging people to consume and invest in risky assets. On Wednesday we received confirmation that the European Central Bank and the Bank of Japan have no intention to slow their respective monetary easing programs. At the same time, we got word that Federal Reserve Open Market Committee had recently debated the need to taper or even cease asset purchases by the end of this year. However, the consensus opinion following last week’s weaker-than-expected employment report is that those discussions will be deemed premature. Therefore, in a perverse twist of events, last week’s poor employment report turned out to be fortuitous for stock investors. Stocks may now resume their march higher on the confidence that the three major central banks will continue pumping money into the system. Or so that’s how the narrative goes.

If this all sounds like a game of musical chairs to you, you are not alone. There are many investors who recognize the inherent riskiness of the Fed’s chosen course of action. However, these same investors also recognize the peril of missing out on the kinds of huge gains we have witnessed over the past several years. We are therefore left with a situation whereby many people are buying for the wrong reasons. Can the anemic growth in the global economy continue to justify the types of gains we are seeing in stocks? Is it a good sign when a horrible monthly jobs report is immediately followed by strong gains for stocks? The answer to both of these questions is likely no, but we could have posed these same questions numerous times over the past few years and been wrong.

Our best advice is to remain invested for the long term, ignoring the short-term fits and starts. We share everyone’s concerns about what the Fed and other central banks are doing. But we still think that high-quality blue chips, in general, are attractive and somewhat defensive investment alternatives in today’s low-rate environment. After all, we must be aware of the upside risks as well as the downside risks. The risk of missing out on a huge bull market could be very costly in reaching your long-term financial goals.