Harris writes “The nine-year rally in the U.S. (and to some extent the global equity markets) has stretched valuations as ultra-cheap money has pushed investors into taking risks larger than what many money managers and retail investors would do “normal” circumstances. The long-term problem for investors is that Bernanke and Janet Yellen were terrified of market reactions whenever they desired to halt the massive QE programs and their beloved use of FORWARD GUIDANCE.”
When Bernanke in 2013 floated the idea for slowing asset purchases, the markets reacted with the infamous TAPER TANTRUM. Bond yields soared and equity valuations immediately dropped almost 10 percent. In response, the FED immediately walked back its plan to tapering its QE program. Because of Bernanke’s and Yellen’s fears about the market, the Fed helped inflate global assets via rapid debt expansion. What has compounded the problem is that the ECB and BOJ have both followed the Bernanke playbook.
The difference that Wall Street is failing to appreciate is that Powell is not an academic and wedded to economic models. Chairman Powell is an experienced market participant and respects the signaling mechanisms that MARKETS provide instead of theoretical probability-based models. Powell is certainly providing a different format to what the crowd had become accustomed to over the last nine years. It seems this group of governors doesn’t fear volatility nor rational asset prices.
Conclusion
Adjust your trading and investing based on a change in the previous accepted wisdom. If forward-looking profits can sustain current prices then the market is priced correctly but if rising interest costs and wages erode record profits the price-to-earnings ratio of the market will adjust, especially as liquidity is drained from the global financial markets.