Since the 2008 financial crisis central banks around the globe have been doing everything in their power to help “reflate” asset prices, with a specific focus on global stock markets. Reflation, is Wall Street jargon for increasing asset prices. In a broad sense, assets are stocks, bonds, currencies and commodities.
2008 Financial Crisis
In November 2008, two months after Lehman Brothers failed (the depth of the financial crisis), the Global Central Banks, led by the U.S. Federal Reserve, launched an unprecedented plan to help reflate both Main St & Wall St. The plan would bring interest rates down to zero (or as close to zero as possible) and the more aggressive central banks would then embark in quantitative easing (a.k.a. QE). Put simply, after bringing rates to zero, the Fed decided to print a billions of dollars out of thin air everyday to help restore confidence and reflate asset prices. The awful bear market ended a few months later when the S&P 500 hit a generational low in March 2009. Since then, the Fed has embarked in 3 versions of QE, helping the S&P 500 soar to fresh record highs!
Here is a QE Timeline Courtesy of CNBC
The Central Bank Put:
The central bank put is a theory that suggests global central banks will step in and stimulate the system if conditions deteriorate. Therefore, the one can safely buy stocks in anticipation that they will either go higher because the economy is improving or global central banks will pump money into the system and “reflate” asset prices. This was the prevailing investing mantra during most of QE.
2014-2015: The QE Trade Evolved
So far, in the U.S., the plan worked. The U.S. stock market and the U.S. economy are both at new record highs and things are moving along at a decent pace. This is still a very “slow” recovery but it is a recovery nonetheless. The picture for the global economy is not as bright. Europe is a mess and growth is slowing markedly in Asia. So at the end of 2014, just when the U.S. Fed decided to end QE 3, other central banks jumped in and joined the party, hence to quote a famous investor, the QE Trade Evolved. This helped U.S. stocks rally but has done little to help offset deflation, mainly in global commodities. On Thursday, January 22, 2015. the European Central Bank announced their version of QE which should help send stock prices higher. So as long as global central banks continue to adopt their “easy money” stance, U.S. stock prices should continue to rally.
