Instead of falling back into recession or secular stagnation, the US economy continued growing and creating jobs as the stimulus was reduced and then stopped. And asset prices, far from collapsing, hit new highs and accelerated upward from early 2013 onwards – exactly when the Fed started talking about “tapering” QE.
The Fed’s policy experimentation points to a third reason for optimism. By demonstrating the success of monetary stimulus, the US has provided a roadmap that other countries have followed, but with long and variable lags. Japan started full-scale monetary stimulus in 2013, five years after the Fed. Europe lagged by seven years, starting QE in March 2015. And in many emerging economies, monetary stimulus and economic recovery only began this year. As a result, business cycles and monetary policy are less synchronized than in any previous global expansion.
That is good news for investors. While the Fed is raising interest rates, Europe and Japan are planning to keep theirs near zero at least until the end of the decade, which will moderate the negative effects of US monetary tightening on asset markets around the world, while European unemployment and Asian overcapacity will delay the upward pressure on prices normally created by a coordinated global expansion.
This suggests the fourth reason why the global bull market will continue. While US corporate profits, which have been rising for seven years, have probably hit a ceiling, the cyclical upswing in profits outside the US has only recently started and will create new investment opportunities. So, even if US investment conditions become less favorable, Europe, Japan, and many emerging markets are now entering the sweet spot of their investment cycles: profits are rising strongly, but interest rates remain very low.
All of these cyclical reasons for optimism are, of course, challenged by long-term structural anxieties. Can low interest rates really compensate for rising debt burdens? Is productivity really falling, as implied by most economic statics, or accelerating, as technological breakthroughs suggest? Are nationalism and protectionism poised to overwhelm globalization and competition? Will inequality be narrowed by job creation or widen further, causing political upheaval?
The list could go on and on. But these structural questions all have something in common: We will not know the true answers for many years. One thing we can say with confidence, however, is that market expectations about what may happen in the long term are strongly influenced by short-term cyclical conditions that are visible today.
During recessions, investor opinion is dominated by long-term anxieties about debt burdens, aging, and weak productivity growth, as has been true in the period since 2008. In economic upswings, psychology shifts toward the benefits of low interest rates, leverage, and technological progress.