Despite tepid GDP growth in the U.S. of around 2% (compared to the long-term average of around 3 ½%), along with a recession in the UK and most of Europe, this year’s stock markets have rallied to multiyear highs.
We believe these strong markets are being driven by the U.S. Federal Reserve Bank’s continuing policy of money creation. The early adopters of these policies, i.e. the USA, the UK and Switzerland, were joined last year by the European Central Bank and most recently, Japan.
Domestically, the Federal Reserve Board has indicated its policy of creating $85 billion (that is billion with a b!) each month with the stroke of a pen and then purchasing the same amount of US government and government agency bonds, will continue for the foreseeable future. In an environment where risk-free money market and T-bill investments pay virtually zero, the ongoing addition of these huge influxes of cash encourage investments into the risk markets of stocks and real estate.
However, we believe this monetary manipulation will only have a short-term impact and the policy, itself, must end at some point. It is appropriate to have exposure to these risk markets at this time, but remain cautious as we head further into 2013 and especially the second half of the year.
Financial Planning and Investment Advisory Services offered through Pacific Wealth Management, LLC, a Registered Investment Advisor · Securities offered through Girard Securities, Inc. Broker/Dealer, Member FINRA and SIPC. Pacific Wealth Management, LLC and Girard Securities, Inc. are not affiliated.