We’ve witnessed an enormous amount of complacency over the last few months. Whether it’s the latest revelation about Donald Trump or geopolitical worries coming out of North Korea, nothing seems to spook the bulls.
That is, until several key global central banks have talked about raising interest rates—the Bank of Canada and the Bank of England—or ending massive bond buys—the European Central Bank.
Let’s state the obvious: stocks never move up in a straight line.
Let’s state the obvious: corporate profit growth is the biggest variable in determining the direction of stocks over the longer term.
Remember when QE in the U.S. was ending? That would kill the bull market. Then we were subject to pundits who claimed that higher interest rates are bad for stocks.
Well, QE is long gone, the Fed is hiking rates, and the Fed appears set to gradually wind down its balance sheet, probably in September.
Where am I going with this? That’s simple. By itself, winding down stimulus by the ECB or rate hikes by other banks are unlikely to be enough to derail the bull market IF the removal of monetary stimulus is in response to faster global economic growth.
Sure, we may see some day-to-day volatility, but rates remain very low among the developed economies.
Yes, we will eventually write the obituary for the second-longest bull market since WWII; however, if history is a good guide, the economic fundamentals and a recession will likely set the fuse for the next significant downturn, not simply chatter that rates may go higher.