Stimulus, Futures, Low Rates = Market Run

While the market took a step back last week, we regained all of it today on Fed Chairman Powell’s pledge to do more and some potential vaccine good news. There remains widespread skepticism in this market recovery, so let’s take a quick moment to look at three main reasons for the market’s strong advance since the bottom on March 23rd.

The first reason is the market is not trading on what is happening today or even tomorrow. On average the market looks one year out. Thus we are now mostly trading on what May 2021 will look like and a majority of experts expect it to be, economically at least, materially better than today. That is why any good news on a vaccine moves the market as next May starts to look even better.

The second reason is that the Money Supply controlled by the Federal Reserve is expanding at an historic pace. That means that the Federal Reserve, in order to stimulate the economy and head off potential deflation, or prices falling, is printing money to buy all kinds of bonds, pay out government, loans and giving banks wider latitude to offer loans. At its core the stock market is auction market meaning it is dollar bills chasing a mostly fixed amount of stock. If you increase the dollar bill supply materially it means that prices go up. This has almost nothing to do with economics but it has an economic effect. We am sure the Federal Reserve is aware of what it is doing to the stock market by wheel barreling cash into the economy.

Last but not least, interest rates are at 0-.25%, a historical low. This is also the doing of the Federal Reserve and it means that very few people want to buy bonds. So as excess cash comes in, more of it goes into the stock market rather than the bond market. It also allows consumers, business and governments to borrow more, further increasing the money supply.

Are these reasons more powerful than our pandemic’s current and near future state? Today the market thought so.

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