This Is The New Normal

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As the world was rolling over into financial crisis in 2008 the stewards at PIMCO coined the phrase New Normal which, very short version, meant low interest rates, very slow growth and in a word; malaise. The malaise seems to be perpetual, the growth might be slower than had been imagined back then and interest rates seem to be going lower.

As monetary and fiscal policies were created and enacted to acquiesce to the New Normal, there were warnings of dire consequences, mostly over extreme price inflation that would prove ruinous. However, the opposite has happened; there isn’t enough inflation (at least as measured by CPI) and monetary and fiscal policies globally continue to increase or otherwise become more accommodative while interest rates keep going down. A couple of months ago there was $10 trillion worth of debt trading at negative rates. That number has since gone up to $13 trillion. The Swiss ten-year note has had a negative yield since January, 2015. The Bank of Japan is buying assets hand over fist with no end in sight.

All the while equities are mostly moving higher. It has been a while since domestic equites had a really big year but they are mostly moving higher, 14 months without a new high for the S&P 500 notwithstanding.

There’s an old cliché that you know and that fits; don’t fight the Fed. The stimulus didn’t offer the bang for the buck that had been hoped for. The low, low interest rates aren’t offering the bang for the buck that had been hoped for but it helps create and maintain a positive back drop for equities. Maybe a better way to say that is it helps create a not negative back drop for equities.

The S&P 500 is up about 8% this year including dividends which seems kind of sneaky-strong but either way that’s a good, not huge, seven-plus months. You’ve heard this as being the most hated bull market in history. That sentiment ties in with a simple idea put forward in Barron’s over the weekend which is that one ingredient for market tops that is missing is excessive exuberance.

Markets can turn at any time for any reason or no reason at all and I am not suggesting that dynamic is changing. Nor has the bull/bear market cycle been repealed. Those market truisms still exist, and if they do still exist, then so too might don’t fight the Fed still exist as a market truism. Regardless of when the next rate hike comes, the Fed will still be wildly accommodative.

There’s a hundred reasons why the bull market could end imminently but that has been the case all the way up. There is nothing wrong with being skeptical about the market’s ability to keep going but there is something wrong if that skepticism has caused you to entirely miss that last couple of hundred percent up. What if the market has another 50% before the current cycle ends? What if it has more than that?

If you’re relying on equity market growth for your financial plan, then you can’t afford to miss that type of lift for being too skeptical. Lagging it in the name of reduced volatility, suitable asset allocation or skepticism is one thing, missing it altogether is another and something most people cannot afford to do.

Don’t over think it. Use a defensive strategy (I prefer the 200 day moving average), heed that strategy when the time comes and that discipline could help you protect bull market gains regardless of when the next bear market comes or what causes it.

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