Understanding The Impact of the ECB Decision
Thus far as global stimulus is concerned there have been two major influences since the credit crisis hit back in 2008. The first was stimulus offered by the FOMC in the United States and the second was the stimulus program offered by the ECB in Europe. The second is still going strong, but the United States and its stimulus ended more than a year and a half ago and the FOMC is instead on a path to tighten monetary policy.
Global markets have not really cared about the impact of tightening monetary policy, save a few temporary undulations, because money flows were steady from the ECB as capital infusions continued, and those were even accelerated when the ECB authorized purchases of corporate debt in June, but those days surely seem to be numbered now.
The ECB did not change its interest rate policy on Thursday, but it was largely expected to expand its policy one way or the other. Whether that would be to allow different types of asset purchases to expand the choices or to extend the program's end date from March 2017 to something further down the line, investors largely expected the ECB to ring the accommodation bell, but they didn't.
Warnings of a disappointment from the ECB stemmed back to the Jackson Hole meeting of central bankers a few weeks ago where consensus suggested that stimulus measures were doing nothing to spur sustainable growth, and the recent G-20 meeting brought both fiscal and structural changes into the scope of influencing longer term economic growth instead of monetary policy.
Central bankers have become less confident in their ability to spur economic growth with stimulus, and that was seen clearly in the ECB's decision on Thursday. Not only did they fail to expand their program, but Mario Draghi said they didn't even discuss the extension of the deadline beyond March. This was a clear topic for possible discussion, but it wasn't even considered, he said.
The ECB attempted to suggest that it would continue to do everything it could and that interest rates would remain low well beyond the end of the bond buying program, but in no uncertain terms the ECB also made it clear that it had not and probably would not extend the end date of its bond buying program beyond March. That's a very big deal!
In my opinion, it is only because there was consistent capital infusions from the ECB that our domestic stock markets have not already fallen more aggressively, and that was even more pronounced when the ECB began to buy corporate debt, which coincidentally happened at the same time as the surprising Brexit vote. When the ECB began to buy corporate debt money flows almost moved directly from that corporate debt into equities of those same companies, whose dividends were largely better than the interest paid on the bonds themselves, and they did it without regard to the valuation levels of those companies.
If you need validation, look no further than Travelers Companies Inc (NYSE:TRV). After Brexit, the stock spiked as investors flocked to its dividend, but its growth rate this year is expected to be -6.3%. We have issued sell ratings on travelers by the way, because of exactly this.
In search of yield, dollars moved directly into the equity market based on our observations and money flows will likely continue to flow into the equity markets until the ECB bond buying program comes to an end, and that end is now officially in sight.
Although some people will argue that the ECB meeting did not produce anything, it did convey a very decisive message and that is that this bond buying program is going to come to an end. When it does those monies that have been supporting the stock market as a direct result of the ECB program will no longer be there to support the market in the future.
Given the market's dependence on stimulus recently, and the 25x multiple on the S&P 500, that could create a scary environment. We're not in Kansas anymore, and the Central Bankers have run out of bullets.
In our opinion, the best place to invest is in a strategy that is proven to be able to work no matter where the market goes. This type of strategy requires trading activities, risk controls, and the ability to make money when the market increases or if it declines, and that is exactly what our LETS strategy has done. We believe this is an excellent place for investors to look when considering proactive trading strategies and we believe that this is the exact time at which people should be engaging in proactive trading strategies. When stimulus comes to an end the entire game that has been played for years will change and traditional investment strategies are likely to flail and proactive strategies are likely to shine comparatively.
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