How Long Will Share Prices Keep Going Up?
Investors all over the world are asking themselves the same question: How long can the current equity bull market continue? Two factors are relevant for this: How long can the growth continue without inflation setting in? And when will monetary policy put an end to the investor-friendly environment?
Some investors are concerned that the strong economy may revive inflation. Given the strength of the business cycle, wage inflation should actually have picked up long ago. However, it is virtually non-existent in the statistics. Could it be that the basic assumption of the Phillips curve, that rising employment also lifts inflation, has become outdated? Perhaps.
Numerous factors seem to be preventing broad wage inflation at present. First, labor market reserves are higher than a cursory glance at the unemployment rate would suggest. This is due to both the rising number of workers leaving the labor force (= falling participation rate) and the better options for employers on alternative labor markets. Second, despite stable wages, most workers have seen their purchasing power increase. Third, the prominence of unions has fallen sharply in all OECD countries. Fourth, new technologies jeopardize some jobs, which puts additional pressure on requests for pay rises.
No End in Sight to Monetary Policy Support
Many investors are worried about monetary policy support coming to an end. But given the lack of inflation, geopolitical uncertainties and the natural momentum built up by accommodative monetary policy – which Johann Wolfgang von Goethe described so aptly in his ballad “The Sorcerer's Apprentice” (a metaphor for the French monarchy's newly created central bank at the time) – a surprise monetary policy liquidity drain by the US Federal Reserve or the European Central Bank appears highly unlikely.
In brief: investing is one of the world's challenging tasks. A broadly diversified approach to asset management is still the best way to navigate through uncertain times.