This past
week saw the Dow Jones Industrial Average reach an all-time high. The S&P 500 index isn’t far behind, just
a few percent from its all-time high established in October 2007. It has been a long 13 years for most
investors. This dreary market has
conditioned most investors to fear the worst from capital markets.
However,
unlike the backdrop to the market peaks of 2000 and 2007, both economic
conditions and monetary policy remain favorable to the equity markets going
forward. In March 2000, the Fed had been raising rates for a full year. There was one more rate hike in May 2000 that
essentially ended the bull market. It
wasn’t until the following year the Fed would lower rates for the first
time. Unfortunately, business models by
US corporations were predicated on unrealistic expectations and the slowdown in
the economy was quite severe.
In 2007
the Fed had just started to wake up to the severity of the subprime crisis when
the market peaked. Indeed the decision to reduce the discount rate in August
and the Fed funds rate in September provided the final spurt that took the S&P
500 to its new high on October 12, 2007.
We don’t need to remind readers what happened in over the next year and
one half.
The
situation today is much different. The
Fed remains in permanent liquidity mode and continues to buy bonds at a furious
pace, with no end in sight. While we
worry about the long term implications of Fed policies to the economy and the dollar, it has definitely worked wonders for the equity markets. Monetary policy is a very important
determinate to investing in equity markets, and remains a positive influence.
In
addition, economic growth over the past two years has been positive, albeit modestly
so. Corporations and consumers continue
to deleverage which is another plus.
None of
this guarantees it will be smooth sailing and we would expect the next downturn
in the markets to be very volatile, especially if the market keeps climbing at
the current pace. If the market
continues to increase at this rate it will almost double by this time next
year. We don’t think that is very
likely.
