How is it possible the worst ten-day start in U.S. stock market history was followed by what Bloomberg termed the sharpest about face in nine decades? While markets never move based on any one factor, the primary answer is central banks. This article examines the following questions:
- Just how far have central banks gone in their recent attempt to keep asset prices elevated?
- Why are central banks so concerned about keeping things propped up?
- What are the shorter-term investment implications and the potential end game?
- How can we navigate this period of hyper central bank intervention?
Central Banks Are Buying Corporate Stocks And Bonds
In an April 20 article, we chronicled the Federal Reserve’s 26-day interest guidance shift that occurred between January 6 and February 1, 2016. The Fed’s extreme shift on rates fell into the rare category. Central banks across the globe are starting to tread into much more radical policy waters.
Do you think it would be concerning if the Fed announced they were going to start buying S&P 500 ETFs in an effort to “stimulate” the economy? That is exactly what is happening in Japan. From Bloomberg:
They may not realize it yet, but Japan Inc.’s executives are increasingly working for a shareholder unlike any other: the nation’s money-printing central bank. While the Bank of Japan’s name is nowhere to be found in regulatory filings on major stock investors, the monetary authority’s exchange-traded fund purchases have made it a top 10 shareholder in about 90 percent of the Nikkei 225 Stock Average, according to estimates compiled by Bloomberg from public data. It’s now a major owner of more Japanese blue-chips than both BlackRock Inc., the world’s largest money manager, and Vanguard Group, which oversees more than $3 trillion.
Distorting The Sanity Of The Stock Market
While investors prefer to see their investment portfolios rise instead of fall, when government institutions start distorting markets there will eventually be negative consequences. From Bloomberg:
A majority of analysts surveyed by Bloomberg predict the Band of Japan will boost its ETF buying — a move that could come as soon as Thursday. “For those who want shares to go up at any cost, it’s absolutely fantastic that the BOJ is buying so much,” said Shingo Ide, chief equity strategist at NLI Research Institute in Tokyo. “But this is clearly distorting the sanity of the stock market.”
The ECB Will Start Buying Corporate Bonds In June
The “non-traditional” central bank policies have not been limited to Japan. The European Central Bank (ECB) is getting ready to launch a new form of quantitative easing (QE). QE typically involves central banks injecting electronic money into the financial system via the purchase of government debt. However, when central banks start buying corporate debt, they are helping pick winners and losers in the private sector. Some companies will be receiving assistance from the ECB, while others will get no assistance. From Reuters:
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