So, why is the stock market doing so well?

WSJ says there are 5 reasons.
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This is an awkward post to write.

As much of the country is struggling to pay the rent and put food on the table, today I’m channeling a WSJ explanatory on why the stock market is doing as well as it is (down 9% from Feb. high, but up 30% from March low)

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Putting my legacy of Catholic guilt aside… The WSJ offers 5 reasons:

  1. Counting on a quick economic rebound
  2. Big tech stocks are doing well during the crisis
  3. Optimism high for corporate earnings in 2021
  4. Rear of missing the upside
  5. The Fed is printing money.

Here are some supporting details & tidbits…

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1. Counting on a quick economic rebound

  • Many analysts are looking past the grim economic data, forecasting a speedy recovery as state economies open back up across the country.
  • The number of new Covid-19 cases has moderated in the U.S. And stocks have surged on any signs of progress toward a potential vaccine.
  • There are some small, early signs that life is resuming some form of normalcy.

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2.Big tech stocks are doing well during the crisis

  • The whole market is not up!
  • The S&P 500 is down 9.3% this year, while a version of the broad stock-market index that gives every company an equal weighting has been battered even more, falling 16.8% this year
  • Five  big tech stocks— Microsoft., Apple, Amazon, Alphabet. and Facebook —together make up about 20% of the S&P 500.
  • Tech companies have benefited as Americans around the country have been sheltering from the pandemic at home, spending time on social media and ordering home essentials such as groceries online.
  • The companies that have suffered the most have little sway over the market’s direction.
  • For example, the entire energy sector is the worst-performing group in the market … but it only constitutes about 3% of the broad stock-market index.

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3. Optimism is high for corporate earnings in 2021

  • Most of the Covid downside has already been baked in
  • investors are increasingly discounting the Covid-19 hit to fundamentals this year and turning their gaze to a 2021 recovery.
  • Once the recovery starts, percentage gains off the lows will be spectacular.
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4. Rear of missing the upside

  • People are making the bets….that this is the bottom.
  • For the fortunate “haves”, TINA dominates thinking: There Is No Alternative to stocks.
  • Treasury yields are hovering near record lows and returns on high-grade corporates remain thin as well.
  • Some investors have even started betting on negative interest rates in the U.S.
  • “Where are you going to put your money to earn a return?”

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5.The Fed is printing money.

  • The Fed made it clear it was willing to step in to buoy the economy.
  • Why bet against the market when the central bank is willing to do that?

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Regarding the impact that the Fed has …

Back about 50 years ago (ouch!), an economist-wannabe co-authored a study in the Journal of Finance titled “The Supply of Money and Common Stock Prices”.

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The article summarized an econometric study that demonstrated a tight link between the amount of money floating around (i.e. Fed-provided liquidity) and, on a slightly time-delayed basis, the price of stocks.

Some classics remain relevant today, if I must say so myself.

One Response to “So, why is the stock market doing so well?”

  1. ST Says:

    I see two reasons the stock market is doing “well”:

    1. It’s an indication of asset allocation, not fundamentals: if you run a mutual fund or manage a retirement fund, you have to demonstrate a return and put the money somewhere and fixed income doesn’t pay and the bond market is too volatile. Other investments have unknown risk: can’t tell you the number of business managers I’ve spoken to that are looking to downsize their commercial real estate portfolio/leases because they now realize that people can work efficiently from home and they don’t need to have everyone at the office every day – significant cost savings for businesses if they can rotate people through the office 2 days a week and eliminate the square-footage they would normally have to carry – – this doesn’t bode well for commercial real estate portfolios. Where else are you going to put your money, precious metals?

    2. Fed has openly stated, and historically demonstrated, that they will pump as much liquidity into the market needed to hold off a depression and minimize a recession – goes to your point #5 above.

    BTW: When your article came out in the Journal of Finance, I was still in diapers. Just sayin’!

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