7.9 Trillion Reasons Not to Fight the Fed, ECB, BOJ or BOE

If record high stock prices and record low yields on corporate bonds in the middle of a global pandemic seem incongruous, look no further than the massive wave of money delivered by central banks for why that’s happening. Collectively, the four leading central banks — setting monetary policy in the U.S., U.K., Europe and Japan — have expanded their balance sheets by almost $8 trillion this year. And it’s still growing. If that liquidity were a country, it’d be the third biggest on the planet based on GDP, ranking behind China.

Investor concerns that the gusher of central bank liquidity will run dry in 2021 are ill-founded in our opinion. Just this morning, the European Central Bank (ECB) unveiled a new round of stimulus. Their special pandemic-bond buying program will now run until at least the end of March 2022. That will add 500 billion euros ($605 billion) to their existing program. And that’s on top of their regular monthly asset purchases of 20 billion euros ($24 billion) that will continue “until shortly before interest rates rise.” And when will interest rates go up? Not for at least three years. The ECB’s newest forecast says inflation won’t be near their target by the end of 2023. Not to be outdone, balance sheet expansion continues at the Federal Reserve, Bank of England, and Bank of Japan as well.

Plenty of risks to the outlook for markets remain, including vaccine logistics, stimulus negotiations, the balance of power in Washington, D.C. and investor positioning (see Monday’s Market Notes). But it is important for goals-based advisors and their clients to remember that the gigantic liquidity backdrop is incredibly supportive for asset prices, and that isn’t changing anytime soon.

P.S.: Other ways to illustrate nearly $8 trillion:

  1. In terms of market cap, it is roughly equal to the combined value of the major equity indices of Germany, Japan, and the United Kingdom.
  2. In terms of S&P 500 sectors, it is 10x larger than the entire energy sector in the U.S., or about 44x larger than Exxon Mobil.
  3. It is equal to just under four Apples, or the combined size of the top five biggest names in the S&P 500 with a cool $700 billion to spare.

This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, please reach out to Chief Investment Officer Scott Ladner at 704-919-3602 or sladner@horizoninvestments.com.


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