Once Again Stocks Rally in Response to Central Banks
I woke up Friday morning to news that stock futures were way up. I didn’t know why, but I was willing to bet it had nothing to do with President Obama’s speech on immigration. Sure enough, it turns out that once again investors were cheering central bank policies. A few weeks ago, it was Japan’s central bank that put investors into a celebratory mood. This time, it was China’s and Europe’s.
This is one of my biggest concerns. Stock prices seem to surge every time a major central bank confirms that things are so bad that lower interest rates or more quantitative easing is necessary. Even though the Federal Reserve has ended QE in the U.S., it is still promising to keep interest rates low. And investors get euphoric whenever there is a suggestion that the Fed may have to keep rates low for longer than it initially thought. Furthermore, all the other major central banks around the world have decided to mimic our Fed. The thinking seems to be that if it worked here, it will work there, too.
But that’s bad thinking precisely because it assumes that economic growth in the U.S. was the result of QE. Loose monetary policies in the U.S. have been extremely effective in causing asset-price inflation; yet they appear to have done very little to help boost economic growth. It is true that economic growth in the U.S. is stronger than it is in Europe or Japan. Still, despite all of the effort expanded by the Fed to get things moving in the U.S., growth is incredibly weak. Given the depths of the Great Recession caused by the financial crisis of 2008, even if the Fed had done very little, we should have seen a much stronger rebound. The lesson to be learned from all this is that monetary policy is not nearly as effective as fiscal policy in lighting a fire under a moribund economy.
Unfortunately, central banks in many parts of the world have not learned this lesson. Or maybe they have learned it, but they also realize that their politicians are about as likely as the ones in the U.S. to actually do something. That might explain the situation in Europe and Japan, but China is another story. After all, there is only one political party in China. Getting things done there does not require a lot of back and forth bargaining between political leaders. Yet China announced that it, too, is taking steps to stimulate its economy. You see, the Chinese are spooked that economic growth was only 7.3% on an annualized basis during the third quarter. Imagine that. Only 7.3% growth!
What worries me are these rallies in response to bad news. Because stocks are not particularly expensive, investors feel comfortable bidding prices higher whenever central banks loosen monetary policies. And because there is little evidence of inflation, central banks feel comfortable adding more and more stimulus. And now that oil prices have crashed, it may be a long time before central bankers start worrying about inflation.
Read Vahan’s blog at Janjig.com.
Vahan Janjigian is Chief Investment Officer at Greenwich Wealth Management, LLC, a SEC Registered Investment Adviser, where he manages portfolios for clients in separate accounts. Dr. Janjigian is a former Forbes magazine columnist and former Editor of the Forbes Special Situation Survey. According to Hulbert Interactive, his stock picks returned more than 18% annually during one of the market’s worst 10-year periods.
Dr. Janjigian holds the Chartered Financial Analyst designation and has earned degrees in general sciences and finance from Villanova University and Virginia Polytechnic Institute and State University (Virginia Tech). He previously served on the faculties of several universities, including the University of Delaware, Northeastern University, the American University of Armenia, and Boston College, where he taught courses in corporate finance, financial theory, investments, accounting, and economics; and he currently teaches a seminar on equity investment management to business executives in Singapore through Baruch College’s Zicklin School of Business. Dr. Janjigian has served as an expert witness on matters involving portfolio management, churning, suitability, and hedge fund manager compensation.
Dr. Janjigian has published his research in numerous scholarly and professional journals; and has been quoted in many leading newspapers and magazines, including Barron’s, Forbes, The Wall Street Journal, and USA Today. He appears as a guest commentator on various television and radio networks, including Fox, CNBC, MSNBC, and CBS Radio. Dr. Janjigian is the author of Even Buffett Isn’t Perfect (published by Penguin) and co-author of The Forbes/CFA Institute Investment Course (published by Wiley).