A segment of the investing community believes the government has been a player in the equity markets for years. That the Plunge Protection Team stands ready to support sagging equity prices is a long-held conviction by many. At the same time, a number of very knowledgeable, experienced people including Art Cashin, UBS’s director of floor operations, scoff at the idea.
I have no information that would support either view, but logical inferences lead me to ask, “Why not?” When stock prices were plunging from 2007 highs, the monetary authorities made it clear that direct asset purchases were to be weapons in the recovery arsenal. While direct purchases of fixed income securities have been the only type publicly acknowledged so far, I have neither read nor heard of the government disavowing the possibility of adding common stocks to its shopping list.
In addition to supporting bonds, the government has added its buying power to real estate, automobiles and soon refrigerators and washing machines. Of course, it has openly taken equity stakes while bailing out several failed financial companies. Clearly the government is attempting to increase the volume of business transactions, hoping the salutary effects will ripple through wider and wider segments of society. A second objective in every government intervention is that of elevating consumer and investor confidence. What better way to boost investor confidence than to push stock prices higher?
There might be no increased suspicion about government interference if the market had not been extraordinarily persistent in its rally from the March lows. Suspicion grows, on the other hand, when the market finds support following technical breakdowns that normally lead to increased selling, not buying. Of course, unforeseen support need not necessarily come from the government. There are several huge financial firms whose interests might be best served by the prevention of a market decline that could further damage already wounded balance sheets. It’s simply that the government has more wherewithal than any other organization, and such market support would be completely in line with its many similar attempts to stimulate and support the ailing economy.
Those of us who value the concept of free markets pray that politicians or government employees don’t fall victim to the government’s desire to provide short-term market support at the potential long-term cost of confidence in our markets. Investors around the world look with suspicion at the Chinese market because of potential government interference. The United States has developed its reputation for top quality investment markets over more than a century. If short-sighted, self-interested government officials should put that reputation at risk, the damage could be incalculable.
Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.