Highlights from the Third Quarter Edition
A resource for both advisors and investors, the Ivy Quarterly gives perspective on the portfolios, investment philosophy and holdings in a comprehensive format. The Ivy Team discusses world markets and where they are finding value today.
Why do we often write about central banks and the price-distorting effects of quantitative easing (QE)? We talk about it to help our clients understand why asset prices keep rising and why we refuse to fully partake in this central-bank-driven stock market mania. Markets are not being driven higher by strong economic fundamentals, which in turn lead to strong sales and earnings growth for businesses. Rather, stocks are rising because of actions by central banks through the portfolio effect of QE and by debt – i.e., poor fundamentals. Therefore, stock markets are extremely expensive. All of our funds have large cash weightings as we attempt to strike the tricky balance of participating in enough of the upmarket to keep our clients moving forward, but not risking losing most of their money if the markets experience another severe downturn.
Historically, the Mackenzie Ivy Funds have experienced poor short-term performance in the first 18 months of a bull market as confidence is restored and poorer quality/more cyclical companies soar. Similarly, we tend to underperform towards the end of a bull market. As complacency increases and markets go parabolic, we become even more careful and thus fall behind. However, we should caution that our poor performance over the last year does not necessarily suggest that the end of the current bull market is imminent. The great differentiator this time is central banks’ explicit involvement in driving asset prices higher, and that could go on far longer than anyone imagined. On the other hand, it could end tomorrow. No one knows. But the longer it goes on, the more difficult it will be to convince people about what is really happening and why they should be increasingly careful. Complacency, greed and rationalization dominate, and caution is abandoned. It’s a pattern that has been repeated time and time again and it will not end as long as central banks are allowed to continue to distort price discovery.
In this Ivy Quarterly Review, we attempt to explain how central banks are driving stock markets higher and how the pernicious effects of inflation and QE distort price discovery, impair economic fundamentals and transfer wealth, resulting in increasing wealth/income disparity.