U.S. Stock Market – Opinionated View
Are you questioning why the U.S. stock market is going up and holding on levels near 2019 highs? Are you trying to understand why or trying to derive a proper analysis behind this upside run? The following opinions may help you out understand why the market is going up.
Note that wherever stock market performance mentioned the Dow Jones 30 Index is used as a benchmark.
(One or more opinions may cross related to one another, but here we are not going into connections. That is for you to decide!).
#1. Pricing the future.
One opinion sees the market pricing for an end to the coronavirus spread and a quick economic recovery in not less than 6-month time. Is this possible? Yes, in fact this will happen if COVID-19 is no longer a concern by disappearing or making available vaccinations for ~7Billion people at a fair price. (Fair price here is important because we don’t want countries to go bankrupt buying vaccines for their people).
#2. Buying, Buying, and Buying.
If you see funds’ disclosures and filings you will see that they are buying and loading up on stocks. Many of them not only buying stocks but also S&P500 and NASDAQ exchange traded funds. This alone could have put markets on current elevated levels.
It is important to know that these holding disclosures are made after some period from the actual purchase/selling dates. So you should dig more into these disclosures and try to get the actual dates, possibly they have purchased on a big market dip or shorted a high.
It is also quite interesting to mention that small investors and amateurs are also buying stocks. We are seeing heightened amount of interest across the internet investment forums. Plus our data reveals that not all stimulus funding have been put into savings and/or consumption where a good amount has been put into the stock market. Pool all those tiny investors together and we will have a multi-billion injection.
#3. Federal Reserve (FED)
The FED has and still pumping money like never before and they are doing it through several payments programs targeting multiple weakening sectors. Trillions of dollars were injected to ease the effect of the virus slowdown sending out a message that a prolonged market dip is not an option.
We are not going to dig in every FED stimulus but in one particular package, the corporate bond buying program, which we think is impacting prices the most. When the news of the Secondary Market Corporate Credit Facility (SMCCF) came out we were shocked. This is the first time the FED taps the corporate bond market.
The double effect of SMCCF:
First, the FED is pushing ~$1 trillion to buy corporate debt instruments. One area of the program that we think is interesting to look at is the unloading of debt instruments of Banks balance sheets and they are doing it at higher rates leaving banks with a decent profit. What is even more interesting is the formation of a consortium between the FED and Banks. An invisible unannounced consortium with one purpose: Purchase Equities. Some central banks, for example in Japan and Israel, do this at a monthly rate and directly through purchasing exchange traded funds. What is different here is that these central banks inject no more than an equivalent of $5 billion but the FED here is doing it through a ~1 trillion program.
Second, through the SMCCF, bonds yields dropped to not at all attractive rates making equities stand out as the only asset offering sweet returns. With this and interest rates at zero percent investors and funds have no where to put their but in equity markets.
#1 #2 #3
To sum up, you may find these helpful in understanding what is going on. We strongly feel FED measures is materially important and centered around this market run.
You should always be aware that opinions are formed based on judgmental analysis and these differ from investor to investor and analyst to analyst. You may also find other valid opinions, views and analysis that may be more/less accurate. With time and constant reading and scanning market related reports and analysis you will be able to identify accuracy rates.