After yet another violent market swoon and snapback, it is entirely possible investors are resting their hopes on a flawed belief.
The first quarter of 2016 displayed a range of emotion that could shake even the most rational of investors.
The first six weeks of 2016 saw stocks rapidly decline, at one point down around 10% to 15%. While the depth of the decline could reasonably be described as normal, the speed was certainly sudden. On the flipside, the market’s recovery over the second half of the quarter has been equally quick.
Today, in fact, most stock market indexes now hover around the zero line year-to-date. No gain and only the fading memory of pain.
It was quite a ride that no doubt favored investors who were either blind or deaf or internet-free, as it has since the recovery began in 2009. Contemplation and preparation has not been rewarded.
To begin the year, investors began anticipating the negative effects of the Fed’s move off of zero interest rates. That concern, coupled with the fact that the economy is still showing only subdued growth and corporate profits have been in decline, investors were quick to cry wolf.
As soon as their cries rang out, central bankers in Europe, Japan and China all responded with more easy money. In fact, describing it as easy money may be an understatement with a large portion of all government debt across the globe now trading at negative yields. Yes, unbelievably, negative interest rates require the investor to pay the borrower for the privilege to lend!
Following suit, our own central bank has consistently backed down the expectations for rate hikes this year and next.
It’s almost ironic that the Fed started to raise rates in December, citing a healthy enough economy to start “normalizing policy”, as they say. Now, growth has stalled out once again, as it’s done repeatedly.
Regardless, my observation is investors don’t care as much about economic growth or even profit growth as they do about the underlying support of central bankers.
The quick market bounce in mid-February almost perfectly coincided with a doubling down of promises of lower rates for longer and more asset purchases around the globe.
Investors reaction to promises of easy money reminds me of the long held belief that objects of different weight – a bowling ball and a feather – fall at different rates.
For thousands of years, this flawed belief was seen as an universal truth by the academic elite. That is, until Isaac Newton showed what other non-academics knew long before, all objects are affected by gravity just the same.
Are investors simply buying into a similarly flawed and long-held belief that central bankers and low rates will always be there to rescue them? We shall see, but I’m placing my bet on gravity.