The stock market has been in a bull market for several months. Investors around the world are weighing the effect that major central-bank moves could have on the global economy. More investors are taking a longer-term view of investments with respect to possible central-bank buys and long-term interest rate decisions. This article will analyze central-bank moves, the potential effects on the stock market, and provide investors with some insight and advice on investing.
What Central Bank Moves Are Taking Place?
Central banks have increasingly taken on a large role in global markets over the last decade. Governments around the world are intervening to boost their domestic economies, allowing central-bank purchases of assets to be used for quantitative easing.
The European Central Bank (ECB) is one of the most active central banks. It has cut its interest rate to zero percent and recently announced a massive 1.2 trillion-euro bond purchase program. The ECB’s program is designed to reduce borrowing costs, support economic activity, and encourage lenders to lend money to businesses.
The Bank of Japan (BOJ) has also implemented massive quantitative easing, a program of pro-growth economic policies. Through its Bond Purchase Program, the BOJ has purchased billions of dollars worth of Japanese Government Bonds and other assets. The BOJ has also lowered its benchmark interest rate to -0.1 percent.
In the United States, the Federal Reserve has taken steps to keep borrowing costs relatively low and provided tools for banks to bolster their balance sheets. The Fed has maintained its current near-zero percent interest rate and their month of April announcement of a $2.3 trillion quantitative easing program was the largest-ever single-week purchase announcement by the Fed.
What Are the Potential Effects on the Stock Market?
The stock market has been significantly influenced by central-bank moves, as these moves have helped to drive up equity prices. As the Federal Reserve and other major central banks have implemented policies of low interest rates and quantitative easing, investors have seen a surge in stock prices.
The ECB’s 1.2 trillion-euro bond-buying program has had the greatest effect on European stock markets, as the program has helped to push equity prices higher. The BOJ’s Bond Purchase Program, as well as its interest rate cut, has also been beneficial, as it has supported economic activity, giving Japanese equities a boost.
The Fed’s rate cuts and quantitative easing policies have also had a positive effect on the stock market. Many U.S. equities have seen increased buying activity following the recent Fed announcements.
What Should Investors Consider When Investing?
Investors should consider several factors when investing during this period of volatility. Low interest rates are helping to bolster asset prices (such as stocks) and reduce the cost of borrowing. However, the long-term effects of central-bank moves can be difficult to predict.
Investors should be aware of potential risks such as rising inflation, currency devaluation, and government intervention in matters involving financial markets.
When investing during this uncertain time, investors should focus on longer-term investments. Investing in low-cost index funds, exchange-traded funds, and dividend-paying stocks can be beneficial as these assets have the potential to perform well over time.
Investors should also be aware of economic and political events that can influence stock markets. Any news regarding government spending, trade, tax policy, or unrest in the world at large can cause stock prices to rise and fall.
Lastly, investors should practice proper risk management. Risk management involves understanding the types of investments you are making, the amount of risk you are willing to take, and the necessary steps to make to protect your capital.
With central-banks intervening in order to boost economic activity around the globe, the stock market has been influenced significantly. Investors need to be aware of the potential effects of central-bank moves on their investments and should focus on low-cost index funds and exchange-traded funds.
Good risk management practices should always be applied and investors should stay informed about political and economic news that could impact stock prices. By taking these steps, investors will be well prepared to take advantage of stocks that rise as central-banks affect the global economy.