Mark Lazar’s September 2020 Newsletter

Monetary policy does not work like a scalpel, but more like a sledgehammer. Liaquat Ahamed

After peaking in February, the stock market correctly anticipated some of the worst forthcoming economic data (in such a short period) in US history, including a record plunge in retail sales, employment, and growth. Consequently, the S&P 500 dropped nearly 35% top-to-bottom.

Data Point
Dow Jones Ind Avg
S&P 500 Index
Foreign Index
Emerging Market Index
2020 Federal Budget Deficit
$3.7 Trillion
US Q3 GDP Forecast
Unemployment Rate

*All data as of 9/4/2020

But after bottoming March 23rd, something remarkable happened; the market again correctly forecast that while the impending economic data would be bad, it would be less bad than predicted—a lot less. Over the coming months, both the S&P and Nasdaq went on to hit record highs. This left a lot of market experts scratching their collective heads. Yes, we know the stock market is forward-looking, but let’s be frank; things weren’t (and still aren’t) exactly rosy, with some sectors of the economy (i.e. airlines, hotels, cruise lines, theme parks, sporting events, concert venues, casinos, etc.) limping along, at best. Let’s look at some of the factors that are driving the market, which may explain such a swift market rebound.

Markets are Forward-Looking

As previously mentioned, markets don’t care what happened yesterday. Rather, they’re attempting to divine what’s going to happen tomorrow; specifically, 6–9 months in the future. Mr. Market clearly believes tomorrow is a better day.

Unprecedented Fiscal Stimulus

Uncle Sam has been throwing everything, including the kitchen sink, at the economy to prevent a temporary contraction in consumption and spending from becoming something much worse. With a (current) price tag of over $2 trillion, the CARES Act was unprecedented in size and scope. This included programs like the Paycheck Protection Program (PPP), stimulus checks ($2,400 per couple, $500 per eligible child), copious unemployment benefits, bailouts for affected industries, etc.

TINA: There Is No Alternative

As referenced in the May 2020 commentary, post-selloff, the stock market has been the prettiest ugly girl in the room. Compared to other asset classes (bonds, real estate, cash, alternatives, etc.), stocks appeared relatively attractive.

Monetary Stimulus

I believe the biggest driver of the stock market post-COVID has been monetary policy. There’s a reason for the old saying, don’t fight the Fed; when the Federal Reserve is accommodative (i.e. lowering interest rates, increasing the money supply, expanding credit, etc.), it’s bullish for risk asset prices. In other words, loose monetary policy boosts stock prices, bond prices, real estate, gold, commodities, etc. In other words, there’s an inverse relationship between interest rates and asset prices.

The chart below illustrates just how aggressively the Fed has been printing money:

The 10-year Treasury yield hit a record low of .32% earlier this year. Considering most pension plans have an assumed rate of return of 7%, it’s evident that number can’t be achieved by purchasing bonds. What’s a pension plan to do in a record-low interest rate environment? TINA; move up the risk/reward spectrum and buy stocks and other risky assets that can at least potentially hit their target return.

Furthermore, with the 10-year break even (expected) inflation rate of 1.70%, Treasury yields currently have a negative real return. In other words, with a current yield of about .70%, the ten-year note provides investors with a negative return of 1% annually for the next decade. Conversely, stocks have historically been a good hedge against inflation.

It could be argued that central bankers have become contemporary alchemists, turning lead into gold, effectively sprinkling monetary stimulus fairy dust on risk assets and, voila! Everything is worth more. I believe this to be at least partially true, however, I learned long ago that that when investors fight the Fed, they’re almost always regretful.

Mark Lazar, MBA
Certified Financial Planner™

Views expressed in this newsletter are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author's opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The S&P 500 is an unmanaged index of 500 widely held stocks. The Dow Jones Industrial Average is an unmanaged index of 30 widely held securities. It is not possible to invest directly in an index. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Gross Domestic Product (GDP) is the annual market value of all goods and services produced domestically by the US. The information in this article is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Investments and strategies mentioned may not be suitable for all investors. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Raymond James is not affiliated with any of the organizations listed above. Neither Raymond James Financial Services no any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. Be advised that investments in real estate and in REITs have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Additionally, investments in REIT's will fluctuate with the value of the underlying properties, and the price at redemption may be more or less than the original price paid. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.