Peep this chart, bruh:
The current state of the stock market is in a phase of transformation unlike almost any the investment world has seen before. The 3 major equity indices, the S&P 500, the Dow Jones, and the Nasdaq Composite, have all hovered around all-time highs in 2016. In fact, the S&P hit its all-time high while the Nasdaq hit its high for 2016, just in the month of July.
Any individual with the faintest speck of economic acumen knows that overall stock performance doesn’t accurately result in a strong/healthy diagnosis of an economy. So when any politician (including our very self-loving POTUS) tells you that they fixed the economy, and the proof is in the stock market, you can tell them: “FOH“.
The record stock price levels we are currently witnessing can be attirbuted to two interventionist monetary policies from the Federal Reserve:
- Unprecedented levels of quantitative easing that has injected billions of liquidity into the financial markets. This monetary policy, in effect, is meant to “prop-up” a market until it is stable enough to be self-sufficient. To this day, economists are waiting for the full repercussions of QE to be realized.
- Unprecedented ultra-low interest rates. This monetary policy is meant to decrease borrowing costs (credit cards, mortgages) with the hope that consumers will spend that saved money, thus ultimately contributing to GDP growth.
So with those two developments in mind, it should make perfect sense that the the equity markets have exploded. Investors naturally want to invest capital in markets with high liquidity levels. With low interest rates, bonds provide lower rates of return, thus enticing investors to use capital in the equity markets.
But if that’s the case, how the fuck do we explain the two phenomenons depicted in the chart above!?
With stocks soaring to record highs, why would capital be flowing out of stocks at record levels? With return on bond investments so low, why would investors pour more into these assets?
Perhaps, actually more likely than not, sophisticated investors are fleeing from an asset class that is projected to be very unstable in the short term (stocks), while returning to a much safer asset historically (bonds).
This theory becomes extra troubling when you realize that last time equity outflows reached this level, America entered its worst economic cycle since the Great Depression. These types of trends continue to pop-up, including in the consumer credit card industry that we discussed here.