The Federal Reserve denies it, but it seems that quantitative easing (QE) is back with us. QE is when money is created out of fresh air with a few strokes on a keyboard and is used to buy financial assets – usually government bonds – to increase their price and push down their yields (interest rates).
You could be forgiven for thinking that the Fed’s unofficial objective is to underwrite the US stock market. This view gained credence under Alan Greenspan in the 1990s when interest rates were cut when things started looking shaky to prop the market up. Investors have been relying on it ever since.
Of course, slashing interest rates after the technology bubble burst in the early 2000s has arguably created the mess we are in now. Cheap money has created too much debt that the incomes generated by economies have struggled to service. Since the financial crisis over a decade ago, which was caused by easy credit and over-valued property prices, we have even more debt and even higher property prices.
For a while now, this backdrop has given grounds to worry about what will happen to the economy, company profits and share prices. But what is the private investor to do? I am not complacent by any means, but I do not see what alternatives they have, apart from owning good quality blue-chip shares that have resilient business models, strong finances and preferably pay dividends. Bonds and cash yield nothing or less than nothing and have no scope to grow their income returns at today’s prices. Even the Greek government is now being paid to borrow, which shows just how ridiculous parts of the bond market have become.
Bad things can and do happen when it comes to shares and if you can’t accept this then you shouldn’t be investing in shares in the first place. Yet, there are pockets of the stock market that look safer than others.
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