Whether in the form of growth or dividend yield, many investors may be enticed to go out on a risk seeking adventure today, given the valuation some of these blue-chip companies are trading at now.
The temptation to assume the world will go back to normal in the near-term and stock prices will continue to move higher due to central bank interventions is understandable. Here's why investors ought to be cautious.
I do agree that central banks have indeed been highly accommodative in their monetary policy and that this stance is not likely to change for quite some time. If anything, I think we could see a semi-permanent move to lower for longer interest rates, as growth continues to slow in a developed markets like Canada and the U.S. in a similar way to the deflationary spiral countries like Japan have been dealing with for the past two decades.
This accommodative global monetary policy stance is likely to be positive for stock markets. However, I do envision a slowdown of medium- to long-term proportions as a result, as was the case in Japan.
These low interest rates improve debt service ratios for individuals and corporations and should, in theory, aid in the economic recovery coming out of this mess.
That said, we've had near historically low interest rates for the past decade. So if this is the new normal, this economic uncertainty should, in theory, inflate proportionally. I would caution any investor considered considering taking an additional risk right now from doing so. I believe the central bank interventions we've seen may not have the desired effect in the coming years.
Invest wisely, my friends.
