“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham
This quote always reminds me that in the short-term, perceived reality wins out (perception) but in the long run fundamentals win. It’s easy to let short term portfolio movements derail a long-term plan but, in the end, you will only hurt yourself.
So, why is the market going up? I get this question every day. Here are a few facts from last week that you may want to ponder:
- There will be a $10 trillion injection into the economy overall. The most severe predictions have GDP down 10% — this represents a $2 Trillion contraction. More than enough stimulus to cover this.
- Disposable income was up 30% due to stimulus.
- The Federal Reserve will start buying ETFs this week. They have back-stopped many asset classes. In total, the Fed will expand its balance sheet by $6 Trillion.
- At least 40% of the S&P index is minimally impacted by Covid19 —Technology and Health Care. Sectors that are greatly impacted are Energy, Financials, Industrials, and Retail.
- Since testing has been a major problem, a better measurement may be to look at the number of tests coming back positive. We have gone from 30% in March to 17% in April to 8.6% last Thursday to 7.8% yesterday as testing has ramped up. A good sign.
- Big Treasury auction this week. The US is on track to issue $4.5 Trillion in debt in 2020. Corporate bond issuance is also high.
- As the Federal Reserve buys High Yield bonds, we are seeing an increase in the appetite by the market for those bonds. However, in munis not as much. Total damage to state and local governments is estimated to be just a little south of $200 Billion. Currently, Congress is working on a bill for $500 Billion of aid for states and local governments. Most likely, this will be negotiated down, but it will invariably provide ample coverage. If so, intermediate and longer-term munis are priced for a sizeable gain.
- Weekly jobless claims are coming down while hourly earnings have gone up by 4.7%. This is telling us that lower wage earners are carrying the brunt of the COVID impact. In addition, the BLS (Bureau of Labor Statistics) has indicated a problem with responses last week. It says it may have underestimated unemployment by 5%.
- Solvency will become a real problem for small businesses if the economic situation doesn’t resolve soon.
- Volatility will continue despite stimulus especially if markets sense that the Fed/government is reducing stimulus. This is consistent with what happened in the 2008-2009 period.
- As an anecdotal measure of optimism, Google search trends are increasing substantially for the following subjects — Used Boats, Home Depot, Home Remodeling, Scott’s Lawn, and What beaches are open?
To discuss these facts and perspective further, I encourage you to reach out to me at 724.942.2639 or set up a no-obligation time to chat HERE.
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