Things always work out in the end
A wall of money
Although there is no longer a steep upward trend, equity markets are still moving upwards. The warnings that equities are historically expensive and that a major crash cannot be ruled out have not so far prevented investors from putting more and more money into the stock market. The markets hardly get a serious chance to sink. Every dip is taken as an opportunity to put new money in. According to JP Morgan, this “wall of money” is mainly caused by private investors, about 70 percent. Research bureau CFRA calculated that in the United States in 2020 for an amount of 249 billion dollars and so far this year even 305 billion dollars of new money flowed into Exchange Traded Funds. Mainly from private investors.
From euphoria to disillusionment
Can this bull market survive once the markets are seriously tested? After the huge rally since the bottom, markets are at record highs. Now that the economy is starting to recover, central banks are being watched with suspicion. How long will they continue to favour the markets with their very loose monetary policy? Will they stay aloof if inflation does not turn out to be as temporary as widely expected? Will this generation of investors go the same way as previous generations in, for example, the 1920s and 2000s? A road that led from frenzied euphoria to total disillusionment.
Every crash was followed by a recovery
A glance at a graph of the world’s oldest index – the Dow Jones – shows that, in the long term, stock markets always tend to rise. No matter how hard the prices fell from time to time, they always recovered. Admittedly, some investors had to be more patient than others, but in the end the prices recovered. In time, losses from a crash were made up for and then rose to new heights. 1929, 1987, 2000, 2008 and 2020, no matter how hard the stock market fell, a recovery always followed. And then the prices kept rising.
A different playing field
However, the unprecedented intervention by central banks and the government may have changed the playing field this time. Now that investors have seen that the state and central banks no longer shy away from any means of combating a crisis, there seems to be no way back. After all, no measure is a one-off. In the next recession, citizens will again count on generous payments from the state to sustain consumption. Stock markets have been used to central bank support when needed since the 1980s – the Greenspan put.
Now that this knowledge is getting through to investors, it will have consequences for the stock market and the economy. Recessions will not disappear, but they will probably be shorter. As an investor, why wait until prices have crashed? The government and central banks will show up anyway as saviours in distress. Investors can get back in earlier. If they have a long-term vision, they do not have to get out at all. Why should they? If things go wrong for a while, the cavalry (with fiscal and monetary support) will show up again.
Recessions will be shorter, but they may also become more frequent. The economy will become more volatile. Government intervention will provide less stability. Central bankers are not getting any easier either. Macro figures are jumping up and down more wildly than before and basing policy on them is not getting any easier. The risk of fogging up is increasing. Occasionally, investors will be surprised by a short, violent movement on the stock exchange. Hedge funds or other professional investors will be taken completely by surprise by a sudden movement and forced to reverse their positions. Corporate results will also become more volatile.
Clarity is power
On the one hand, therefore, an increasing degree of government intervention will reduce investors’ fear of a fatal crash. On the other hand, the greater sense of security will contribute to riskier behaviour. With more volatility as a result. Will this make markets even more complex? Perhaps. But as the Israeli historian and futurologist Yuval Noah Harari aptly put it: “In a world where we are awash with irrelevant information, clarity is power”. Don’t worry, the crash will come, one day. Just as surely as the recovery that follows.