One prominent strategist says the market is high literally and figuratively. Albert Edwards, global strategist at Société Générale, cautioned on Thursday that stock markets were becoming “stoned on free money,” leaving them “detached from reality.” It’s a condition that the strategist says could “prove fatal,” in the end.
U.S. equity benchmarks — and those across the globe — have roared back from a late-2018 selloff that culminated in one of the worst December returns in years, but Edwards says, in a Thursday note, that those gains have been largely aided by central banks that are willing to “inject another dose of euphoria into its market patch.”
Indeed, since a Dec. 24 low last year, the Dow Jones Industrial Average DJIA, -0.58% and the S&P 500 index SPX, -0.59% have both advanced by about 20%, while the Nasdaq Composite Index COMP, -0.61% has returned about 23%, thus far, as of trading midday Thursday, according to FactSet data.
Easing trade-war tensions between the U.S. and China have helped stocks rebound, but a policy pivot by the Federal Reserve in January arguably delivered the most substantial shift in investor sentiment over recent weeks.
The Fed, headed by Chairman Jerome Powell, said it would be more patient in assessing future rate moves, and minutes of the January gathering released on Wednesday indicated that its efforts to reduce a $4 trillion asset portfolio could conclude as early as the end of 2019. Both policy strategies, raising interest rates and shrinking the asset portfolio, had been viewed as headwinds for markets, tightening financial conditions unduly.
Edwards, known for his consistently pessimistic views on the global economy and markets, said signs of more accommodative tendencies by the Fed, and more recently the European Central Bank, which was said to be thinking about reviving a plan for further stimulus to Europe’s banking sector, known as the targeted longer-term refinancing operation, or TLTRO, is the source of his concern (see excerpt below):
| Every major Central Bank in the world has done its bit to inject another dose of euphoria into its market patch. The Fed has been the most visible and dominant dealer, cruising the block and turning heads with the screeching sound of the handbrake turn it just pulled. But the other key central banks also seem ready to defend their monetary turf, with ECB board members talking of resuming TLTRO, the BoJ Governor Kuroda’s promising Japan’s parliament he would deliver more QE if required, and finally the PBoC allowing a record $480bn surge in bank loans in January. |
Edwards concludes that an investment community hooked on monetary opioids could foster bubbles in the financial system. That is to say, he believes that central bankers’ inability to end easy-money policies that had been put in place to address the 2007-09 financial crisis could lead to more risk-taking on Wall Street that could lead to a fresh crisis.
For its part, the Fed has said its pivot has been based on the belief that its policies were creating “crosscurrents” in financial markets that could lead do harm to the economy and come amid evidence of softness in economies outside of the U.S.
Read: ‘Patient’ Fed takes wait-and-see stance as worries about economy grow
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