OK, I posted Part I a month ago (and here’s its prequel, Welcome to the Floating World…), so you may want to skim those posts again. [Especially as the world’s changed so much since then…what with the bond markets going crazy, Greece staying crazy, etc. 😉 ] To briefly summarise:
The central banks ‘control the price of money, and everything else is a function of the price of money‘, and post-crisis they embarked upon the greatest price-fixing experiment ever – an echo/amplification of the entire era leading up to the late ’60s/early ’70s. Consequently, sustained near-zero rates has meant there’s a wall of money that’s slowly but surely being forced into the equity market. And just like the early ’70s, investors have & will continue to exhibit a distinct preference for Nifty Fifty stocks, i.e. large cap/blue chip companies which guarantee (or at least offer the illusion of) predictable quality & growth in an uncertain economic & fiscal environment. Small & mid cap stocks may be neglected accordingly, but will probably end up getting dragged higher regardless.
As for liquidity, central banks will basically find it impossible to reverse the explosion in their respective balance sheets…Pandora’s Box is now open. And GDP growth may prove irrelevant – since positive/accelerating growth is likely to underpin/encourage market sentiment & valuations, whereas weak/negative growth will simply elicit fresh expectations of central bank stimulus. Most of all, regardless of potential rate increases (or bond market volatility), the absolute level of yields means stocks will arguably remain cheap at any price…
But I really don’t have to make the argument: If/when this bull market keeps marching higher, I have no doubt we’ll be spoon-fed all the erudite & compelling arguments we need to justify it, ’til investors can no longer help themselves & inevitably turn the market into a self-reinforcing bubble. I’m not saying this is necessarily a logical process (what bubble is?!) – but I am saying it could easily happen, plus I’m also saying it could well turn out to be unprecedented…
[Again, it’s worth remembering two recent & very relevant quotes:
Buffett – ‘Everything is a function of interest rates. Interest rates are like gravity.’
Tepper – ‘Don’t fight four Feds!’]
So, what are the implications for my portfolio?