A Lingering, Unresolved Quandary

A Lingering, Unresolved Quandary

by Zach Marsh on Dec 13, 2019

This week it seems as if there is beginning to be some light at the end of a long tunnel of uncertainty.  Two items that have been hanging over, not just the market, but the entire geo-political system, appear closer to resolution.  Not only can this portend to be a good, short-term lift for the stock market, but almost more importantly, we can finally stop hearing about it on the news. 

First, China and the U.S. reached agreement on “Phase 1” of a trade deal.  With few details actually in writing and uncertainty over how legally binding any of the agreements actually are, the market’s positive reaction to the news seems to signal that it is just happy to see thawing tensions.  Second, with the Tory victory in last night’s British Parliamentary elections a Brexit resolution early next year seems all but guaranteed.  Resolving a saga which has been ongoing since 2016 might help spur growth in Europe, which has never fully recovered from the 2008 financial crisis.

While resolution of these two issues may provide relief to financial markets, much of that relief may prove to be short-lived.  One greater issue that seems to be left unresolved, and it is an issue pre-dating either of these other two issues is whether or not the stock market can stand on its own without constant assistance from central banks worldwide.  Back in October, the Federal Reserve recommenced its bond purchasing program.  Chairman Powell was quick to tell us that it is not a new phase of Quantitative Easing, but if it’s not QE it is a lot like it. 

Over the last 10 years the path of stock markets worldwide has followed fairly closing the path of Central Banks balance sheets.  Meaning that a not insignificant portion of the stock market’s gains since 2009 can be attributed to the amount of money being pumped into the system via central bank interference.  So the remaining outstanding questions of greater import seems to be:  1) Can this market get by without a little help from its friends?  2)  If not, how much longer will central banks continue to support the market? and 3) Will the market eventually stop responding to all of the capital injections and begin to fall under the weight of elevated valuations?  These questions will most likely prove more important than trade deals and Brexit resolution.  The answer to one, or all of the above questions will most likely shape the path of the stock market for the foreseeable future. 

Central bank asset purchases has successfully stifled volatility among higher risk assets, notable the stock market.  Last year, when the Fed was tightening via raising interest rates and not purchasing bonds, stock market volatility surged.  When the Fed jumped back in this year volatility fell and stock prices rose.  While everyone likes the punch the Fed is serving, and no one ever finds faults with rising stock prices, the encouraging of risk taking via suppression of volatility can prove dangerous.  Bubbles are created by reckless risk taking and this happens when investors lose sight of the potential for markets to fall. 

Over the past 20+ years the Fed seems to have tended to encourage this type of reckless behavior.  First in the late ‘90’s, Chairman Greenspan failed raise interest rates, allowing the “Tech Bubble” in stocks to form.  This failure led to a long bear market, with the Nasdaq index losing over 75% from its highs.  It took over 14 years for the Nasdaq to fully recover those highs from 2000.  In the 2000’s the Fed left rates low as home prices exploded.  When the housing bubble burst fortunes were lost, and lives were devasted.  Over the last 10 years the Fed and other central banks have pumped money into the financial system at an unprecedented level.  Even after years of market gains and low unemployment, central banks refuse to lift the support.  When either the support is gone or the market no longer responds to the support, how will stock prices react?  I suspect that the answer will come but like Brexit it could still take a while.    

              

   Disclosures

All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.  Tax laws are complex and subject to change. Calibrate Wealth LLC, does not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Calibrate Wealth. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.

 

This material does not provide individually tailored investment advice. It has been prepared without

regard to the individual financial circumstances and objectives of persons who receive it. The strategies

and/or investments discussed in this material may not be suitable for all investors. Calibrate Wealth

recommends that investors independently evaluate particular investments and

strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a

particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of

factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii)

governmental programs and policies, (iii) national and international political and economic events, war

and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities

and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other

disruptions due to various factors, including lack of liquidity, participation of speculators and

government intervention.

 

Foreign currencies may have significant price movements, even within the same day, and any currency

held in an account may lose value against other currencies. Foreign currency exchanges depend on the

relative values of two different currencies and are therefore subject to the risk of fluctuations caused by

a variety of economic and political factors in each of the two relevant countries, as well as global

pressures. These risks include national debt levels, trade deficits and balance of payments, domestic and

foreign interest rates and inflation, global, regional or national political and economic events, monetary

policies of governments and possible government intervention in the currency markets, or other

markets.