Central bank liquidity is the ‘IV drip’ of the rally, and here’s what could happen if it dries up

If it weren’t for liquidity right now, the stock market rally could be ripping apart, according to BMO Private Bank’s chief investment officer.

“Any sense that this IV drip of liquidity coming into the market is slowing down at all is going to cause some issues,” Jack Ablin said on CNBC’s “Futures Now.”

He emphasized that investors have been encouraged to take on risk due to the trillions of dollars being pumped into the financial system by central banks.

Ablin’s comments came a day after the Federal Reserve decided to lift short-term interest rate by a quarter percentage point.

Even though the rate hike was expected, Ablin admits there was some concern tied to the Fed’s statement. The Fed put in some new wording, saying that it “expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.”

That part left Ablin “a little bit taken aback with the timing,” he said. However, “I think the good news here is, ‘Look, this is a potentially contrived crisis.’ This could be the taper tantrum all over again where [The Fed says] ‘OK, look, we don’t want to cause major upset here. We will continue to pump if equity risk taking takes a hit.'”

Ablin said he’s “somewhat optimistic” that the rally will continue. He prefers developed and emerging markets over U.S. stocks, arguing that places like Europe could see bigger gains than in the United States because the economy has been surprising experts to the upside.

He prefers sectors such as technology, discretionary and materials, but said he’s very bearish on energy, which could ultimately hurt the rally, too.

“I was in the camp that oil prices would stay $45 and above just because I felt like Saudi Arabia would sit at home and eat peanut butter and jelly sandwiches to keep that oil price high in anticipation of the Aramco IPO,” Ablin said. “This last little downtrend is somewhat disturbing because we have reached that 45 number.”

Leave a Reply

Your email address will not be published. Required fields are marked *