The world’s central banks have been very vocal about what’s to come. Lower interest rates lead to increase asset purchases and what seems like an endless cycle of quantitative easing.
What does all this mean for the markets?
What the central banks do now could be the primary influencer driving the bull market.
The Federal Reserve and other central banks are looking to stimulate growth and inflation moving forward.
It’s crazy that there is over $10 trillion worth of government debt currently generating a negative interest rate. If you’re not familiar with what a negative interest rate is, it basically means if you invest one dollar today, your dollar will depreciate over time even after collecting interest.
How would you like to invest a $1 today and in 10 years only have $.95? The banks want us to believe that this is the new norm.
But for smart investors, there’s going to be a long-term payoff to understand how the market is going to react to what the banks are trying to do.
The first thing I want to look at is the inverted yield curve, that first inverted back in May and stayed inverted for three months. Most economists took notice.
Why is this important? Every time this has happened in the past, the market has gone into recession.
But of course, this is just one indicating factor.
Another thing to consider is the dividend yield on the S&P 500 index, which back in August was at 1.97% versus the 30 year US treasury trading at 1.94%. When stocks are yielding more than bonds, it’s much better to be investing in stocks. The last time this happened was in 2009, and we all know what happened with stocks over the next ten years.
So is there a recession coming?
There’s always going to be a recession, but I don’t see it coming anytime soon.
The fact is a central banks used to be slow to react and, as a result, a recession. However, today, the banks are better at predicting the future and rolling out and aggressive stimulus plan to keep the market moving forward.
The central banks aren’t wasting any time waiting around the see what might happen. They are aggressively taking action to ensure that the market keeps moving forward.
How can we go into recession when the banks are making debt financing incredibly affordable so businesses can thrive, encouraging capital expenditures and pushing growth.
For those who agree with my outlook and make smart investment decisions based on market fundamentals should continue to generate far above-average returns, especially when you play the market with options. At the same time, the rest of the world sits on their hands and lets their money sits stagnant in assets producing negative interest rates.