But that monetary stance could store up trouble down the road should the financial threats materialize.
Such talk has since faded. “There doesn’t seem to be the same idea of having tighter monetary policy so as to lessen the risk of asset bubbles developing,” Wright said.
Perhaps that’s not surprising given the shakeout that occurred in financial markets at the end of last year and Trump’s preoccupation with the performance of stock prices.
The strong bounce-back in markets this year means that financial conditions are still accommodative, though not quite as loose as they were before the end-2018 sell-off, according to the IMF.
“There are reasons for fearing the economic consequences of very low’’ rates, former Treasury Secretary Lawrence Summers said in an April 15 presentation at the Peterson Institute for International Economics in Washington.
“These include a greater propensity to asset bubbles’’ and “incentives to substantially increase leverage,’’ the Harvard University professor said.
The immortal words of Chuck Prince “as long as the music is playing, you've got to get up and dance” seem appropriate to ruminate on at this juncture. Wall Street is back testing or exceeding all-time highs, the Dollar is reasserting its uptrend against an increasingly large number of currencies and the Fed is on hold.
By committing to halting ending its policy of quantitative tightening, the Federal Reserve has signalled to the market that the new Fed chief is willing to back stop the stock market. That alone is something that will increase the appetite for risky behaviour. If one doesn’t cast aside caution that is likely to contribute to underperformance relative to a Wall Street benchmark, while leverage and concentration in a narrow band of winners will contribute to outperformance.
This article highlights the fact that four shares have contributed 50% of the Nasdaq-100 performance this year. Amazon, Microsoft, Facebook and Apple have returned to outperformance and taken the wider market with them. These do not look like bubbly shares, although Amazon arguably has the potential to fit that category. The question therefore is the extent to which they are likely to move into true bubble territory.
Given the continued strength of the Dollar, the margins and growth of cloud based technology and the willingness of the Fed to tolerate risk taking there is a solid argument that we are in the 3rd psychological perception stage of this medium-term bull market which is characterised by mania and potentially acceleration.
I continue to think there is a near-term risk of a consolidation to unwind the overbought conditions that have evolved over the last few weeks but the medium-term outlook appears skewed towards additional upside.
If this is the 3rd psychological perception stage of the bull market, as appears likely, it is the time to be most conscious of the consistency of trends and most diligent with stops.Back to top