Today’s rational exuberance is justified by synchronized global growth
LONDON (Project Syndicate) — With share prices around the world setting new records almost daily, it is tempting to ask whether markets have entered a period of “irrational exuberance” and are heading for a fall. The answer is probably no.
What many analysts still see as a temporary bubble, pumped up by artificial and unsustainable monetary stimulus, is maturing into a structural expansion of economic activity, profits, and employment that probably has many more years to run. There are at least four reasons for such optimism.
First and foremost, the world economy is firing on all cylinders, with the United States, Europe, and China simultaneously experiencing robust economic growth for the first time since 2008. Eventually, these simultaneous expansions will face the challenge of inflation and higher interest rates. But, given high unemployment in Europe and spare capacity in China, plus the persistent deflationary pressures from technology and global competition, the dangers of overheating are years away.
Without hard evidence of rapid inflation, central bankers will prefer to risk overstimulating their economies rather than prematurely tightening money. There is thus almost no chance of a quick return to what used to be considered “normal” monetary conditions — for example, of U.S. short-term interest rates rising to their pre-crisis average of inflation plus roughly 2%.
Instead, very low interest rates will likely persist at least until the end of the decade. And that means that current stock-market valuations, which imply prospective returns of 4% or 5% above inflation, are still attractive.