We entered a new era of administrative markets, where stock market returns are affected as much by government policies as by corporate profits. We seen corporate bailouts, multi-trillion deficits also known as fiscal stimulus, zero interest rates, multiple rounds of quantitative easing, punitive trade wars and federal debt that is now bigger than the economy. Some of these measures provided stability and improved consumer and business confidence, a key requirement for strong economic growth. But over the long run, these measures distort markets and disorient investors.
Investors got so used to these administrative markets that they are so shocked when they discovered that the Fed plans to do what it said it would do: Let inflation run higher to promote employment and economic growth.
It is a mistake to put too much faith into the idea that the central bank and congress will do whatever it takes to backstop the market. The Fed’s mandate is stable prices and maximum sustainable employment and not forever rising stock prices.
It is desirable for the central banks and governments to step in and support the financial markets during emergencies like the financial crisis and the pandemic but it is dangerous to believe that they will always be there to support the stock market, when it is actually not needed.
The Fed and government have few bullets left to support when another emergency occurs. what will central banks and governments do? Take interest rates from zero into negative and the debt from 100% of GDP to 200%? After a while, they will be pushing on a string.
Stock prices used to rise or fall on something more predictable than central banks money printing and government policies. Business fundamentals like sales, earnings and margins were important. And they should be again.
Sven Franssen