Investors cannot become complacent as central banks keep interest rates low and fund the economy with more money.
In “The Unbearable Lightness of the Central Bank Put: When Will the Economic Reality Align with Expectations?” authors Tyler Mordy and Andrew Gapski advise investors to “cautiously swallow the pills prescribed by central bankers.”
Mordy and Gapski conduct a thorough outline of the investment implications and possible counter strategies with seven specific guidelines:
- Companies grow by earning buybacks and dividends – look for companies that are growing sales.
- Big institutions drive money – go to where the institutions will invest before they go.
- Currency wars – go to where countries are in the process of devaluing currency.
- Stocks and bonds are not a good leading economic signal – follow non-market indicators and use a tactical asset allocation.
- Interest rates do not provide income – look at dividend paying stocks.
- Globalization – invest in countries with a rising middle class.
- Increased volatility – do not get complacent; avoid more volatile investments.
Investors will benefit from trying to anticipate actions that policymakers will follow.
Let’s review some of the authors’ findings. According to BCA Research, only 63% of the jobs lost in 2008 and 2009 have been regained. Investments in capital equipment and software have stagnated in the last 15 years. Employee compensation has remained idle as corporate earnings continue to increase. The government injected trillions of dollars into the economy, and yet we are not back to the previous levels of income and employment seen in 2007. Last, ultra-low rates and high monetary activism have boosted stock and bond prices, which have simultaneously created a business environment of uncertainty, discouraged savings and have ultimately led corporations to resort to financial engineering to boost earnings.
To date, low interest rates and the printing of money have increased stock and bond prices with little impact to underlying economy. Markets have soared on the government’s wings, and investors are reaching for greater risk without realizing the impact of their actions.
Investors need to decide if they are willing to reach and ignore the consequences, or patiently wait for a meager return made without putting money at risk.