The BOJ and Fed made it clear last week that overly accommodative monetary policies will remain in force until all mandates are being met and are sustainable.
The BOJ set a new course managing the slope of the yield curve. This creates a favorable environment for financial institutions to lend to boost growth. The Fed maintained its funds rate while lowering its targets for future economic growth, employment, inflation as well as the funds rate over the next two years. The Fed concluded that long-term growth will be less than 2% and core inflation may not break the 2% threshold for years to come. So why rush and hike rates now?
Fears of premature Fed tightening evaporated quickly on Wednesday after the Fed decision and press conference with Janet Yellen. The markets reacted accordingly.
It's equally clear that the baton is in the process of being passed from the monetary authorities to the politicians to implement programs to stimulate growth above the Fed base case. I believe that this will occur regardless of who becomes our next President, but I support Trump's economic agenda over Hillary's. How much of Bernie Sanders economics plan will she adopt? In particular, her inheritance tax plan would be dead on arrival in Congress. I hope that she listens to Bill for economic policy advice on tax reform, free trade and less regulation.
I see real moves for fiscal easing in Europe too, despite Germany's resistance. And the same goes for in China and India where policies will sustain growth over 6.5% for this year and next.
The bottom line is that we are nearing an inflection point for an acceleration in real global economic activity and operating earnings with stable monetary policies. Monetary authorities are on hold, interest rates are low, and earnings are about to take off. Not a bad prescription for a rising stock market. Our market would even be undervalued even if 10-year treasuries were yielding 3.0% while it's just 1.6% today.
Policies take time to implement, so be patient, however the market has a way of discounting anticipated future results quickly. The market has not made much progress over the last few years as earnings have actually declined. That's about to change. The market pundits will have to factor in higher earnings as well as lower interest rates than previously assumed which is the formula for a rising market led by economic growth beneficiaries.
Listen to the economic agendas of both Presidential candidates tomorrow night. Decide for yourself which one is better for our country's citizens. This is about substance, not personality. And another big questions is whom can you trust to actually do what they say, as talk is cheap.
Both candidates will present pro-growth policies for the next four years. The markets will anticipate change early on, as Congress will have to go along with change or be voted out next time. This election is about growth, first, and social values, second.
Investing in global economic growth will impact all financial instruments: stocks, bonds, currencies, and commodities. It's really quite simple to select the winners and losers out there. Remember, too, that investors have record levels of cash and are under-invested in stocks. Buy growth beneficiaries and sell/reduce the safe stocks. And don't own bonds of any duration. I would stick with quality stocks only, which means great management teams, sound strategic plans and rising cash flow, dividends and buybacks.
In closing, review the facts, step back, reflect and consider current mindsets, consider the proper asset allocation, risk controls and liquidity and finally, do in-depth, independent research on each investable idea.
William A. Ehrman is managing partner at Paix et Prosperite LLC.