Surfing the waves of liquidity

If you believe that investing is a lot like surfing, you might also see how the giant waves of liquidity unleashed by the European Central Bank and Bank of Japan’s bond-buying programs could reach the shores of North America.

Just as waves radiate from the centre of a storm, Carmine Grigoli, chief investment strategist at Mizuho Securities USA, believes recent stimulus efforts by monetary policymakers are poised to take investors for an exciting ride, driving global stock prices much higher. But he thinks riding and surviving these epic waves will be challenging.

He cautions against watching the waves from the safety of a sandy beach, since any stock-market pullbacks related to a rate hike from the U.S. Federal Reserve are expected to be short and shallow, followed by quick rebounds.

“Simply, the financial markets have largely assimilated the news and the trajectory of future rate increases is expected to be much more subdued than in past cycles,” Mr. Grigoli told clients.

More specifically, he thinks the fundamentals are in place for the S&P 500 to rise to 2,250 by late summer and to 2,300 by year-end.

The strategist cited attractive valuations for equities relative to treasury bonds, as well as the apparent growth in M&A and strength in share buybacks.

As for the possibility of Japanese and European liquidity finding its way to U.S. markets, Mr. Grigoli noted that these two bondbuying programs combined are roughly 1.5x greater than the Fed’s QE III program launched in 2012.