U.S. stocks gained broadly on the news, proving that Europe and the U.S. are consciously coupled in the minds of investors. (There’s really no other explanation for the broad-based rally.)
 
Press accounts of the ECB’s bond buying plan point to the effort of central bankers to fight the weak inflation that tends to accompany a struggling economy. All other factors being equal, pumping money into a system tends to be inflationary. But why are low prices in and of themselves so bad?
 
A decent explanatory piece by Bloomberg provides some answers. Using language that a grade schooler can understand, the piece explains how low prices beget even lower prices, hurting both business and underlying stock values in the process.
 
“When shoppers see persistent price declines, they hold out on buying things. They ask, will I get a better deal next week, next month, next year? As a result, consumer spending flails,” writes Bloomberg’s Shobhana Chandra. “For most nations, that’s a big chunk of their economy, and any slowdown in consumption threatens growth.”
 
Of course, one isn’t going to postpone buying needed consumer items like a quart of milk or, in my case, coffee. In that respect, the explanation seems lacking. But for bigger ticket items, this explanation makes sense.
 
Chandra writes that businesses behave pretty much the same way. “They postpone buying raw materials, hoping to get a break on costs, and delay investing in that splashy new facility or hiring an extra hand.”
 
In addition, she writes, these businesses’ pricing power — the ability to charge more — vanishes, making it harder for them to grow profits. “In such an environment, if companies want to grab a bigger market share, they have to slash prices. That makes things worse.”
 
Meanwhile, a couple of investment articles caught my eye.
 
Since the research shows that asset allocation decisions weigh more heavily on an investor’s final results than individual security choices, I am always interested in good stories about asset allocation, even though they may lack the excitement of a good yarn about an interesting stock.
 
Writing on his blog, The Reformed Broker, financial advisor and market pundit Joshua Brown refers to some fresh research by the respected shop Research Affiliates, which makes a great case for holding to an asset allocation of 60% stocks and 40% bonds for the long run.
 
“RA takes a look back at the last ten years and calculates the annualized return of a classic 60% equity / 40% fixed income portfolio versus 16 pure asset classes on their own. The 60/40 portfolio generated 7.2% annual returns (nominal) from 2005 through the end of 2014, edging out 9 of the 16 asset classes in their data set and with significantly less volatility than most as well,” Brown writes.
 
“Are there better ways to invest than the classic 60/40? Sure there are,” Brown writes. “Will you be able to identify them in advance? Can you bear the added risk of a portfolio tilted toward higher expected returns, through the really rough times where that extra return is actually earned? What are the costs associated with supposed ‘better’ investment strategies? Can they be justified on an after-tax, net of transaction expense basis? Those questions are probably some pretty high hurdles for a lot of the so-called “better” or more exciting strategies to surmount, no?”
 
A piece by StreetAuthority writer Joseph Hogue touts the merits of playing a long-term investing trend with a few stocks. That trend, according to Hogue, is the trillions of dollars of high-net-worth baby boomer wealth that will be passed to younger generations over the next 30 years.
 
“More than $6 trillion is set to change hands in the U.S. alone and more than 30% is in liquid assets and could be easily spent,” he writes. “If that were not enough, this transfer of high-net-worth assets is only a fraction of the world’s $241 trillion in wealth, much of which will also transfer over the next three decades.”
 
Hogue argues that luxury-brand stocks Estee Lauder and Coach will benefit from this trend, among others.
 
“The transfer of wealth and increasing means of the wealthy should act to drive sales for luxury brands even while the future is less certain for discount retailers,” writes Hogue.
 
While I don’t doubt that this wealth-transfer trend will occur, I question whether the aforementioned luxury brand stocks will necessarily be the recipients. Who can tell whether they will be selling what the rich of tomorrow want?