On March 9 of 2017, the U.S. equity market celebrated the end of the bear market and the beginning of what has become one of the longest stock market advances in the history of the financial markets.
The continuation of this extraordinary bull market has been driven by the aggressive policy moves made by the central banks. These moves have involved the monetization of debt through quantitative easing programs flooding the financial system with liquidity.
These bond-buying programs in turn have driven rates in the sovereign credit markets to levels once considered unthinkable. Rates for two-year notes across Europe and in Japan have fallen to below zero while rates in most other markets remain stuck in negative territory when adjusted for inflation.
Years down the road from the end of the financial crisis, we are now finally entering a phase where central bank leaders are now seeing the signs that a return to more normal monetary policy is appropriate.
The move by the Federal Open Markets Committee to hike rates at its March meeting marked the third such move in policy over the past decade and possibly the beginning of a meaningful divergence in global monetary policy.
We are believers in the idea that monetary policy is a key driver of values in financial assets; therefore, we live by the motto of “Don’t fight the Fed.” It is not so simple in these unusual times to look back on history where, in the post-World War II period, tightening in monetary policy generally led to volatility and rising risk in equity markets.
We are finally entering a phase where central bank leaders now see signs that a return to more normal monetary policy is appropriate.
It is also always dangerous to say “It’s different this time.” But in this case, market strategists and monetary policymakers lack the playbook for moving policy back to more “normal” terms. In fact, the risk of moving too soon to normalize rates, as happened in Japan and England during this long, low-rate cycle, may be impacting the pace of the Fed’s policy direction.
Perhaps it is the lack of historical precedent to lean on and the pain of two bear markets so far in this new millennium that explain the lack of enthusiasm for what has been one of the greatest bull markets of our time. Even the idea of writing those words “greatest bull markets of all time” gives us pause. Market sentiment over this long run has generally not exhibited the level of enthusiasm, never mind the euphoria, which historically accompanies market tops.
The motto, “Beware the crowd” has surprisingly not delivered the type of cautionary signals we would have expected by now. If this has been the most unloved bull market, as many in the media claim, then it bodes well for this long run to new highs to continue.
While corrections cannot be ruled out and would even be welcome, the longer-run case for equities will remain constructive as long as the central banks continue to provide monetary support. That may be an oversimplification, but to be a bear, you have to be willing to fight the Fed. Politics overhangs global markets, but if the aftermath of the Brexit vote and the U.S election is indicative of anything, it is that the Fed and the economy still matter the most.
Tony Maddalena is a wealth advisor with the Wealth Management division of Morgan Stanley in Purchase, NY. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, member, SIPC, www.sipc.org. Morgan Stanley financial advisors engage Worth to feature this article. Maddalena may transact business only in states where he is registered or excluded or exempted from registration, http://fa.morganstanley.com/themaddalenagroup. Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Maddalena is not registered or excluded or exempt from registration. The strategies and/or investments referenced may not be suitable for all investors. CRC1739629 03/17.
This article was originally published in the May–July 2017 issue of Worth.