Markets have changed and probably not for the better. Investor complacency seems to be the norm as their reliance on central banks and policymakers to come to the rescue every time the market starts to jitter, makes them sleep comfortably at night.
In what has been the longest bull market in history, it seems people can't fathom it ever coming to an end. But, good things do come to an end. The difference this time is the risk has moved from the private sector to the public sector in the form of central bank balance sheets. Fortunately, or unfortunately, they can kick the can further down the road than your everyday investor.
From peak to trough in the GFC the S&P500 dropped close to 58%. This was an equity market that was owned by private investors. As panic set in and liquidity dried up, central banks were forced into the market to create liquidity and provide support. This was the right decision, and if you read Ray Dalio's work, you may concur.
Unfortunately, after such a strong rise in the equity market and a likely peak in the business/economic cycle, it could be about to change. Before it has even happened though, politicians and market pundits are already calling for central bank stimulus.
In a world where the equity market can't fall -2% without calls for stimulus, it surely must make the more astute investor question the strength of the underlying economy and potential forthcoming volatility in the stock market?
As the fundamentals seem to deteriorate further, it seems only a matter of time until the market catches on. The last quarter of 2018 was a prime example of central banks painting themselves into a corner where they can't raise rates or unwind the balance sheet without the market selling off.
If the economy needs stimulus with low-interest rates, near full employment and a record high stock market, investors should ask: what happens when those factors change?
While magazine covers maintain inflation is dead, the only way central banks get out of debt... is inflation.
Many now seem to think the Fed's job is to fight the business cycle and ensure there is an endless linear growth path. With the Fed supporting zombie companies, there is no creative destruction... this is not capitalism, it is a form of socialism where savers and the next generation are ripped off to support people with assets.