Stocks had a big day, to complete a fourth consecutive week of higher highs, with higher closes.
As we discussed back in my July 28th note: The one-two punch of monetary policy adjustment (the Fed stating it had reached "neutral" on rates) and fiscal policy adjustment (not one, not two, but three new massive government spending packages), was "a green light for a resumption of the rise in asset prices."
We're seeing it.
If we step back a bit and look at the bigger picture, we had about a six-month period where markets priced in a world where central banks would attack inflation.
But now it's becoming increasingly clear that both global QE and low rates are "you can never leave" scenarios. In this post financial crisis (and post-pandemic) world, the financial system is too fragile to extract global liquidity, and sovereign debt is too fragile to raise interest rates.
With that, the policymakers are now back to flooding the economy with money.
This is a resumption of the big theme of the past two years.
The theme: You have to be long asset prices, to hedge against the broad rising cost of living.
If we look back at the early 80s period of inflation, where inflation averaged nearly 10% per year over a four-year period, being long stocks not only gave you a hedge, but increased your buying power by 30% over the period. Going to cash destroyed your buying power by 33% over the period.
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