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The End of Easy Money

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The stock market has been a one way bet for many years, it has been easy to make money but the good time is coming to an end.  Stocks are about to underperform other assets.  There is a limit to the rate of ascent, when a market goes up constantly the market becomes disconnected from the fundamentals, it becomes expensive and in a bubble, then the bubble bursts.
Asset prices don’t go up for ever.  Sometimes they give you the impression that they will go up for ever, but it is an illusion.  Take the US stock market, the S&P 500 has produced some spectacular returns since 2008, with the help of QE.  Without QE stocks would be significantly lower today.  Not just stocks but other assets like real estate… What QE has done is create a mania in asset prices, it has encouraged ordinary people to invest in assets that they would normally not touch.
We saw last year a sharp rise in the number of retail investors, they perceive the stock market as “safe”.  This policy of printing money has created an increased participation from retail clients, nowadays too many people rely on the stock market to grow their money and that is the problem.  QE is coming to an end, the stock market engine will stall.  What will happen to the stock market and the economy?  The two are linked.
Central banks are trapped, they have created too much liquidity and now we have inflation.  They have encouraged too many people to take risks with their money, too many people are invested in stocks.  A drop in the stock market will be accompanied by a rise in interest rates, this would translate into a drop in property prices and an economic slowdown.  Central banks have a problem, to fight inflation they will need to lower asset prices by raising interest rates, if they are too aggressive with the hikes the stock market could collapse.
They must be careful not to crash the stock market.  I think if the stock market rallies near the all-time high they will be more hawkish and if the current decline extends they will be more dovish, that’s the way to do it without causing too much damage.  So far markets don’t seem to panic, sentiment is still positive despite the tensions between Russia and Ukraine.
Stocks could rally from here and this will be welcome news for the Fed, they will be able to turn hawkish, then yields will spike and the stock market will go down. I am not sure if the next turn in the S&P 500 comes after a new high or below 4818.  But one thing is sure, assets that benefited from the Fed’s QE will go sideways or down for some time.  Meanwhile unloved markets like gold and silver as well as bonds should do well in this environment.
Thierry Laduguie is Market Analysts at

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