TRAVERSE CITY — In one corner, the Federal Reserve is busy stacking up dollar bills on top of each other.
In the other, the beleaguered American economy is putting up one mediocre data point after another. In the middle of it all, investors remain baffled.
This is shaping up to be an old-fashioned slugfest.
Since late 2011 — about twenty months ago — central bankers of the world have jolted financial markets. They’ve curtailed investor concern and have orchestrated a 50% run in stocks through their experimental monetary policies.
With each crank of the printing press over the past four years, investors have been rewarded by following one simple rule: when central banks print, just buy stocks.
The rule has worked during each monetary campaign. It worked with the Fed’s quantitative easing (QE1 and its QE2) and also during the European Central Bank's long-term refinancing operation (LTRO.) It worked with the Fed’s QE3 and the ECB’s outright monetary transaction program. And, now the Bank of Japan (BOJ) has joined in.
It’s a truly dizzying display of acronyms.
As long as the world’s awash in cash with no productive use, the thinking goes, stocks are the only game in town...until central bankers run out of letters of the alphabet.
The fundamentals supporting the market are troubling and growing more so. The stock market has now reached a level where poor future returns are basically baked into the cake. Unless the economy improves substantially, traditional passive investment strategies are likely destined for disappointment. Just Google “Shiller PE” for evidence.
Over the past year, real income growth is hovering at about 1 percent. Job growth has averaged a meager 1.5 percent annualized over this entire recovery. Plus, household savings rates are now near all-time lows. That’s weak wage growth plus weak job growth plus a shallow pool of savings. There is a predictable result to this equation that no acronym can solve.
It’s no wonder company earnings growth has slowed considerably. Over the past year, revenue and earnings growth have both been close to flat. Worse yet, profit margins are elevated to totally unsustainable levels. If any economic data point is likely to revert to its historical average in a competitive economy, it’s profit margins. Go ahead, Google “Corporate Profits as % of GDP” to see the last fifty years.
The battle between monetary policy and the economy has so far been dominated by the bankers. Central bankers are increasingly seen as a floor placed under the market. Based on the last 20 months — let alone the last four years — it’s no wonder investors have grown to rely on acronyms and axioms. QE1, Don’t Fight the Fed, QE2, LTRO, Don’t Fight the Tape, QE2 and OMT, There Is No Alternative, etc.
To this we’d add, knowing the letters of the alphabet doesn’t mean you know how to read.
Jason P. Tank is a Chartered Financial Analyst and co-owner of Front Street Wealth Management, a fee-only wealth advisory firm located in Traverse City. He encourages questions and comments about future columns. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com