It’s The FOMC’s World
For the last few weeks in the weekly market update I write for Alpha Baskets, I’ve included a reference to at least one of the many forms of dysfunction that is influencing markets. Last week the Nikkei 225 took a dive because the Bank of Japan did not, for the umpteenth time in a row, ramp up its asset purchases/take rates further into negative territory.
In the most recent market update I questioned whether current FOMC policies might be enough to stave off recession (at least so far) but just can’t quite seem to move the GDP needle, growth has been far below growth in previous recoveries/expansions.
Of course the European Central Bank adopted a negative rate policy a while ago and increased its monthly asset purchases from €60 billion to €80 billion. But as was stated when the ECB first announced its asset purchase plan, there isn’t enough paper available to actually buy that much so it also added corporate debt to its purchases in addition to sovereign debt.
There are other countries with NIRP and ZIRP policies including Switzerland, Sweden and Denmark and yet with all of this, nothing seems to be going the way policy makers would hope.
In the US, the FOMC has been getting progressively more accommodative with diminishing returns the further they go. Do you remember six or seven years ago there were a stat floating around that divided how much the government was spending divided by the number of jobs created and it turned out it would have been cheaper to simply give everyone $100,000?
During the heart of the financial crisis and accompanying bear market I regularly commented that if it was the worst financial crisis since the Great Depression that we should expect it to take many years to work through it. Eight years later (depending on how you count) there is no end in sight. Last week the FOMC appeared to back away from a June hike and I think started setting the table for no hike this year (we’ll see about that one).
All of this is serving to distort prices in capital markets. Without Fed and Treasury intervention would the now seven-year-old bull market* have started? It would have, but maybe not when it did and maybe not with as much liftoff as in those first few years. Interest rates are of course painfully lower for investors and retirees which might be ok if more Americans were benefitting from borrowing at such low rates. The boom and bust in the energy market was arguably fomented by low interest rates; cheap money borrowed and put into the various shale projects that altered the supply and demand equation which caused the price to implode and so on.
*I am on record from last year as saying I think a bear market started. A lack of a new high for almost a year supports the notion of the market rolling over but of course the two declines since last August are nowhere near large enough to be considered true bear market declines.
The conclusion here is not a multi decade decline like in Japan as the US has shown the ability to make new highs with all of this (earlier in the decade). I won’t try to predict long term rates of return for the market but since 2000 we have endured average annual returns below the long term average. Investors should be prepared for that outcome in terms of savings rates, the willingness to be slightly more tactical than they needed to be before the internet bubble and ready to adapt their circumstance to a financial market outcome that falls short of their advisor’s Monte Carlo simulations.