It doesn?t take an awful lot for panic to set in. After all, it was that long ago when investors were fretting over whether it was safe to buy shares. And at the blink of an eye, those same investors are now panicking over how long the market rally can go on for. I have even heard one commentator talk about the markets behaving with irrational exuberance. There is just no pleasing some people!
Truth is, shares were very cheap some five years ago. That was…
It doesn’t take an awful lot for panic to set in. After all, it was that long ago when investors were fretting over whether it was safe to buy shares. And at the blink of an eye, those same investors are now panicking over how long the market rally can go on for. I have even heard one commentator talk about the markets behaving with irrational exuberance. There is just no pleasing some people!
Truth is, shares were very cheap some five years ago. That was the time when the financial collapse of banks dragged down the valuations of a whole swathe of businesses in its wake. Such is the irrationality of the markets. Things are either “very, very good” or they are “very, very bad”. There is never a happy medium – well, not for sustained periods, anyway.
Thing is, the foundation of this rally is built on the massive stimulus programme put in place by the US Federal Reserve. I can still remember Ben Bernanke’s pledge to the people of America that the US will not go into recession on his watch. This became known as the “Bernanke put”. What he meant was that he would print and pump as much money as necessary to keep the US economy afloat…at any cost.
The stimulus package created negative real interest rates. In other words, leaving money in your bank account would cause your nest egg to shrink in value in real terms. And who wants to see a shrunken egg?
But such is the power of the US Federal Reserve and its big bazooka. The upshot was a subsequent hunt for yield that saw seasoned bond investors rotate out of fixed-interest securities into high-yielding shares. That became known as the “great rotation”. Even non-stock market investors started to join in as they foraged for yield in the share market.
However, we can’t give Ben Bernanke all the credit for the stock market rally. There are some good fundamental reasons why shares have risen. For example, China appears to have avoided a hard landing that many had predicted could happen. Additionally, Mario Draghi at the European Bank took a leaf out of Ben Bernanke’s book by pledging to do everything necessary to save the euro. And let’s not forget that companies have been making higher profits and sitting on bigger and bigger piles of cash.
Meanwhile, back in the US, the world’s biggest economy avoided bumping its head on the debt ceiling and falling off the fiscal cliff. Even the sequester, that forced the US government to cut spending by $85 billion seems to have passed without too much of a calamity bar a few bruised egos. But who really cares about politicians and their egos.
However, one day Ben Bernanke will have to stop pumping money into the US economy. And that will be the day when the rally comes to an end. However, we here at The Motley Fool are not too concerned about whether the stock market is rising or falling. Instead we delight in looking for stock market opportunities all the time. The secret, though, is to fish in ponds that no one else has thought about fishing in.
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