The Central Banks in Europe, United States, and Asia have undertaken an unprecedented experiment in monetary policy. Trillions of Euros, Dollars and Yen are being injected into the financial markets through securities purchases. To this point it has been a success in that it has stabilized the technically insolvent banks and has allowed them to shore up their balance sheets by being able to borrow money at essentially zero interest rates then lend it out at 4,5,6 percentage points higher. In reality the central banks have transferred the money that should have gone to you and I through normal interest rate payments on savings and government bonds to the banks.
Another effect is that it has lifted the stock market because, very simplistically, some of every dollar etc. printed out of thin air has to find its way into equities. It is a version of the crowding out theory.
To this point I have been willing to go along with the “Don’t fight the Fed” trade, but recently there have been some warning signs that have worried me. Most recently, it is that the bond market which has usually followed the stock market (rates higher=stock market higher and conversely when rates go lower the stock market goes down) has diverged paths. Rates on the 10yr Treasury have gone from 2.1% down to 1.65%. Then has recently retraced that whole decline. The stock market has usually reacted negatively to this type of volatility but has not as of yet. It is well known that growth is slowing around the world and things are especially bad in Europe. Stocks have chosen to ignore bad news for now.
To err on the side of caution I am currently lowering stock market risk in all accounts I manage. My gut tells me this is the right thing to do right now. There is the possibility that the market will continue to ignore these warning signs, or that the market sees better things on the horizon. I expect that the market will move higher albeit with greater volatility this summer.
Posted in: Blog, Investment Outlook