PIMCO chief Mohamed El-Erian points to three hypotheses that, week in and week out, “invigorate and sustain the stock market rally.” The three are valid, he notes, yet their longer-term implications may be far more complex than most investors fully appreciate.
“Equity markets believe in the ‘Fed put,’ or the view that the Federal Reserve will increase its monetary policy stimulus in response to any (and all) meaningful decline in risk assets,” he writes in a blog post on Yahoo! Finance.
Second, market participants also “have reason to believe that the steadfast focus of the Fed forces other central banks around the world into more accommodating monetary policy.”
Lastly, then there is the “kick the can” hypothesis, seen lately, which is the view that even unusually dysfunctional political systems, be they European or in America, repeatedly find ways to avoid outcomes that would be really disruptive to markets. El-Erian predicts that, as with the fiscal cliff, the sequester deadline will pass, followed by what he calls a “clumsy” compromise and a continuing resolution.
He then considers each of the three.