Everlasting Monetary Policy and Rising Equity Markets

The major US equity indices closed at new record highs on Friday, with the S&P 500 rising 1.75% over the week. The tech-heavy NASDAQ Composite breached the dotcom bubble peak reached in 2000. In Europe, the FTSE Eurofirst 300 closed up 1.2% for the week, despite a stronger Euro. Japan’s Nikkei 225 index closed at a 15-year high, up 1.9%, while Chinese equities continue their rapid ascent. The mainland Shanghai Composite equity index was up 4.16% last week, as speculation mounts that looser monetary policy lies ahead in China.

In Roald Dahl’s Charlie and the Chocolate Factory, Willy Wonka claimed he had a secret machine to create an everlasting gobstopper, ‘you could suck on them forever and they would never get any smaller’. Looking at equity markets and their pavlovian response to monetary policy, it would seem that central banks have created a machine whereby the marginal effect of monetary policy never wanes and equity markets continue to move higher. However, unlike Wonka’s gobstopper, it seems implausible to believe that the fine taste of rising equity markets can last forever for investors. Equity markets are long overdue a healthy correction; it would not be such a bad thing for long term investors.