James Quackenbush, The Daily Record Newswire
After the robust stock market performance in 2013, U.S. equity markets took a breather in the first quarter of this year before regaining traction and resuming their upward bull market trend. We are currently in the fourth longest bull market in history and the question on many market participants’ minds is: When will this bull market end?
Though we may be in the later part of this historical bull market run, the equity market gains could continue as long as major world central banks maintain their accommodative monetary stance and the global economy continues to show signs of improvement.
Indeed, there is truth in the expression: “Don’t fight the Fed.” Along similar lines, one might also say not to fight the actions of the world’s central banks. By conducting asset repurchases and having low or negative rates to promote borrowing, much effort has been placed on stimulating slow economic growth by boosting consumers’ ability to both borrow and spend. For years, central banks’ actions have provided a tailwind for global stock markets and created stimulus-driven economies.
In the U.S. in particular, after the financial crisis, the U.S. Federal Reserve began a series of aggressive asset purchasing programs. Additionally, the federal funds rate was reduced to its lowest rate in history, down to basically zero. These actions have helped the U.S. economy rebound from the brink of collapse to the stable, low-growth, low-inflation environment we are in today. Although the growth rate is not as vigorous as many would hope and first quarter growth was actually negative due to bad weather, growth should continue at a moderate pace going forward. Because of this, growth is strong enough for the Fed to continue tapering their asset-purchasing program but not strong enough to warrant increasing the federal funds rate anytime soon.
In addition to the Fed’s monetary actions, other central banks around the world are taking extreme measures to support their economies and combat deflation fears. The European Central Bank recently announced it was instituting a negative deposit facility interest rate.
The intent of implementing the negative rate is to encourage banks to lend money. Coupled with low borrowing costs, reduced interest rates make it less attractive for individuals to save and more attractive to borrow. This sequentially promotes economic growth and is designed to increase the low levels of inflation in the Euro zone.
Even with these unchartered actions, Mario Draghi, president of the ECB, has reminded the world that all actions have not been exhausted and the ECB has further tools to be utilized if needed. Specifically, the ECB could institute its own quantitative easing program, similar to what is being done by the Fed. These actions would also help support growth and relieve deflation fears.
Outside of Europe, the Bank of Japan has implemented its own version of unconventional stimulus to combat the deflation problem that has plagued the country for over 15 years. Under the program known as “Abenomics” (named after the country’s prime minister, Shinzo Abe), the BOJ has been using extreme quantitative measures to purchase seven trillion yen worth of government securities on a monthly basis. This has expanded their monetary base with the aim of achieving a two percent inflation target. The BOJ is likely to continue their asset-purchasing program into 2016.
With such a large amount of global monetary stimulus taking place, foreign and domestic economies have been slowly recovering, stocks continue to make new highs, and company earnings’ expectations are rising. World central banks will continue their accommodative monetary policies into the foreseeable future, which should translate into stable economic growth, controlled inflation, and positive returns for stocks.
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James Quackenbush is a senior domestic equity analyst for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.
