The financial markets, U.S. in particular, have staged a V shaped recovery. We now follow the economic releases closely for confirmations of the same recovery in the real economy. The earnings reported so far in the second quarter have not been as negative as analysts have feared, with many companies beating estimates with a large margin.

Given the recent market recovery, people begin to wonder if traditional measures in the fundamentals that investment legends such as Warren Buffet or Peter Lynch follow still matter in an environment where governments and central banks are committed to providing a backstop by purchasing financial assets. Is it possible that the US economy in particular has unlimited firepower given its leading economic and reserve currency status?

Great market cycles are not new phenomena. While I have not personally lived through the Great Depression, I have taken the time to understand its economic lead up and the eventual impact when people lost faith. In many ways, the central bankers today and their actions are direct learnings from past policy responses.  During the 1930s, central bankers did not respond with decisive actions to combat the deflationary pressure of a bubble bursting and the US economy was not able to recover until the US Dollar was devalued and was off the gold standard.

Can the Fed ever stop purchasing assets?

One prominent market observer denounced the stimulus policies during the Great Financial Crisis, citing the markets are hooked on financial heroine, the magnitude of purchase in financial assets or quantitative easing have now far surpassed the level seen in 2008-2009.

There is the question of how solid the economy or the market fundamentals are without the support of governments and central banks. The old adage of “Don’t fight the Feds” still ring true and investors are rewarded by being on the side of the Federal Reserve and purchase what they are buying.

The market is now pricing in low probability for interest rate increase until 2025. The decline in real and nominal interest rates have certainly explained the meteoric rise in Gold.

Source: RBC Portfolio Advisory Group

There is no doubt governments now play a more active role in the market economy. There is a growing reliance on government interventions but the verdict is still out as to if the efforts to stimulate the economy will generate real growth or just growth in assets such as stocks, bonds, real estate and gold.

Through the traditional lens of fundamental analysis, the markets certainly are not cheap, however in an ultra-low interest rate environment where high interest savings yield close to zero, not investing can also be very costly. To borrow investment legend Howard Marks’ mantra, “Let’s move forward, but with caution”.

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