Despite rising interest rates from near zero to almost 5% since 2022, speculative activity in US asset classes has surged anew. This exuberance is driven by the belief that government and central bank support, including market rescues and corporate bailouts, provides a continuous backstop, fostering an "asymmetric risk" environment where losses are capped by the state and gains are unlimited. The mantra among investors is "BTFD" (buy the f***ing dips), indicating a strong confidence in market resilience. Only very low interest rates have disappeared from the previous "easy money" era; other forms of state support persist, giving investors confidence that "nothing will be allowed to go wrong."
Factors contributing to this persistent bull market include the resilience of the US economy, its leading role in AI innovation, and a pro-business political environment. The pandemic saw significant cash infusions into consumers, some of whom started investing as a game. While this enthusiasm briefly paused with rate hikes, it quickly resumed when authorities intervened to guarantee deposits during the Silicon Valley Bank run and injected $400 billion into the banking system. Furthermore, the Federal Reserve delivered a rate cut despite sticky inflation when investors clamored for one, further reinforcing the perception of state support.
Retail investors are increasingly active, with four of the five biggest days for retail buying this decade occurring in the last five weeks. This heightened activity, alongside corporate investments and stock buybacks fueled by lingering liquidity from pandemic-era government spending, indicates strong belief in continued market gains. The "bailout culture" traces back decades, with rescues becoming more generous and automatic over time. Short sellers are dwindling, and lenders are offering low premiums on loans, suggesting a widespread lack of concern about defaults and a market that appears to move in only one direction: up.
Experts suggest that an end to this speculative era might require a more dramatic event, such as a major geopolitical conflict like a US-China war over Taiwan, or a significant central bank miscalculation resulting in uncontrolled inflation or a deep recession. The current belief is that bull markets are "murdered," not that they die of old age. The strong May employment data, exceeding expectations at 172,000 jobs, pushed rate-cut probabilities lower and led to a more hawkish Fed tone, driving up real yields. However, strong underlying growth and corporate earnings continue to provide a fundamental backstop, leading some analysts to maintain an overweight equity allocation despite these signs.
