As the historically unprecedented bull market crosses over the ten year mark, what explains the continuing vitality of the stock market? Will the rally never end?
Comments made by federal reserve chairman, Jerome Powell in December 2018 that the fed was leaning towards making two additional 25 basis point rate hikes in 2019 sent the market into a tailspin as 2018 drew to a close. Despite previous Powell’s previously stated position that the fed was not in the business of maintaining a bull market, he relented and abruptly quashed the idea of any 2019 rate hikes.
Undoubtedly, the reaction — or overreaction — was due to investor unwillingness to believe that the halcyon ten-year period of zero-interest rates was finally over. The extent of the selloff can be explained, in part, by the fact that a decade of unfettered quantitative ie easing by the fed, led to a mismatch in asset pricing; an inverse bond/equity relationship took hold.
As the yield on alternative, fixed-income investment vehicles barely pierced the 1% threshold. Investing in risky assets during this easy money period, in essence, implicitly had the fed’s blessing. In earlier comments, made in 2018, Powell noted that he was more concerned with asset misplacing than in runaway inflation; he believed investor speculation could have adverse ramification for the economy.
The current posture of the fed in conjunction with investor’s confidence that the low rate environment will remain unchanged, has created a bizarre stasis or equilibrium . As long as the fed remains concerned or circumscribed by its fear of causing another October bloodbath, the more comfortable, or less circumspect investors become for favoring riskier assets like stocks and below investment grade corporate bonds.
This symbiosis provides support for a market in which tech stocks continue to rise beyond their previous all-time highs.
Where this will all end, only time will tell.