Keep in mind that prior to this recent appreciation, the market had declined 20% in the summer of 2011. While the markets have soared since then, the rise is coming off of a major decline. Also, keep in mind that the S&P 500 has averaged a less than 1% annualized return since 1999, with 2 declines of over 50%, and countless of 10% or more. While the recent surge seems to be immense, when put into context, it is minimal.
We are not the only managers who share this view. Almost everyday, someone of reputation says one of two things. Either, the markets are distorted and artificial because of QE, or QE is having little-to-no permanent effect on the economy. This is the dominant thought in the economy and markets today. Everything you see happening in the markets is thanks to QE, and therefore artificial and temporary. Someday the Federal Reserve will stop. When this happens, it will all go away, and it will end badly.
In order for Quantitative to translate to the real economy and prove successful, investors and business owners need to believe that the current market gains are permanent and not temporary. This is a theory posed by Milton Friedman in the 1950’s called the Permanent Income Hypothesis. It states that a sense of permanence is necessary for a wealth effect to materialize. This is not the case currently. The increase in asset prices has been artificial as evidenced by many of the smartest and most successful money managers warning of the fallout that will ensue due the Fed’s extreme measures. The chart below, from Pew Research, makes it apparent that QE has not achieved the wealth effect it has set out, to as only the wealthiest 7% of households in the United States have benefited from the Fed’s policy.