If you own shares at the moment, you are probably reading the news and wondering whether you should be happy with property prices and stock markets hitting all-time highs (especially in the USA), or concerned that markets are about to experience a major correction.
The answer lies in these two key short and longer term influences.
President Trump won his election almost one year ago. His platform included cutting taxes, injecting $1 trillion into infrastructure development, repealing Obamacare, and “buying American”. Stock markets took this as a green light, and since his election, have rallied some 20% in anticipation of his hugely stimulatory election pledges. However the rally is now at a critical juncture, as Congress is still yet to finalise and pass the $1.5 trillion tax cut.
Since the Great Recession or Global Financial Crisis (GFC), major economies have been grappling with negative or stagnant growth, asset prices falling, high unemployment, and depressed investment. The USA thought they had the magic answer – money printing (also known as Quantitative Easing).
In the height of the Global Financial Crisis as the sub-prime mortgage defaults claimed massive companies like Lehman Brothers and Bear Stearns, the United States’ central bank embarked on an idea to flood the system with money (print money) by buying $600 billion in mortgage-backed securities. This program was only expected to be short term, but lifted their ordinary holdings of securities from ~$700 billion to over $1.75 trillion. The cash injection didn’t help, and the US Federal Reserve upped the ante with two more rounds of QE.
As time dragged on, Europe battled with indebted Eurozone members. The European Central Bank forced Portugal, Ireland, Italy, Greece and Spain (PIIGS) into fiscal austerity measures to pay off their big debts. But this action dragged the Eurozone into a sink hole of falling asset prices, unemployment and so on. At around the time the US was about to complete their money printing, and ECB Chief Mario Draghi had been cutting interest rates, and was about to embark on his own version of money printing.
In 2017, the amount of money injected since 2008 by the three main central banks (including Japan) now sits at around $14 trillion.
Overnight, the Europeans announced they will “Taper” or reduce the amount they buy each month to €30 billion, starting in January 2018.
The US Federal Reserve has already announced they will reduce their $3.5 trillion portfolio of assets soon.
The net effect of these measures is a reduction in the amount of money swishing around in the system. Looking at the chart above, you can see just how much these central banks have injected over the last decade. Reducing or turning of the taps will instantly see low interest rates evaporate. Instead, higher interest rates will flow, and with less money in the system, current asset prices are at risk. This puts the current value of your share or property portfolio at risk.
