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Now comes the bill of ultra-loose monetary policy since 2008

  • S&P 500 – WKN: A0AET0 – ISIN: US78378X1072 – Kurs: 3,674.84 Pkt (S&P)

In English there is the expression “There is no free lunch.However, for the past 10 years it has seemed like food (high stock market returns) was free. The shares continued to grow year after year. Corporate profits haven’t moved with them for a long time. The rating continued to rise.

You may be convinced with the low interest rate policy. With negative interest rates, there is no alternative to stocks. Shares thus became increasingly isolated from economic reality. After the end of the financial crisis, US nominal economic output has increased by 70% to date. The stock market, on the other hand, was able to rise sixfold.

You can’t call it anything other than financial alchemy. Businesses are worth what they earn. What companies can generate is in economic performance. In the long run it makes no sense if the stock market and economic performance differ too much from each other.

However, year after year, investors have been taught better. The rating continued to rise. As long as the trend continues, no one is complaining. Sooner or later the bill has to be paid. The time is now and it will be painful for investors and families.

The rise in US household wealth since 2009 is almost entirely due to an increase in financial wealth. Before the financial crisis, total assets represented 586% of economic output. Financial assets were 368%. Before the start of the stock market correction, total assets reached a value of 700% of economic output. Financial assets had risen to 493% (Graph 1). Families are richer today than they were then, largely thanks to the stock market.

Financial assets consist mainly of bonds and shares. The share of bonds shrank as low interest rates were perceived as unattractive. Thanks to higher equity allocations and a long bull market, equities more than offset the decline in bonds (Graph 2).

It is precisely this shift to equities that has pushed the market higher. Gradually, over the past thirteen years, more has been directed to the stock market. The performance was good and there were hardly any alternatives. When all households that could buy shares have bought, there is a lack of supply of buyers.

Failure to offer buyers coincides with unfavorable circumstances (inflation, reversal of interest rates, etc.). An upward trend can no longer be fundamentally justified. The authorized correction is in progress. With each passing day that the correction continues, retail investors get more and more nervous. Gradually, what can keep the downtrend alive for a long time is being sold.

This long-term trend is nothing more than a reallocation of assets. This shift is cyclical and each cycle lasts several years. A cycle of falling equity allocation has just begun. Equity allocation precedes stock market returns by 10 years. I talked about it a few weeks ago.

The May article data can now be supported with additional data (Graph 3). A downward trend in yields is expected in the coming yearsn. At worst, US stocks will not be any higher in a decade than they are today. This is the price of good returns from the last 10 years. The past high performance is now balanced with the low one.

It could also be said that performance was a priority.

Clemente Schmale


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