by Peter Thoms, CFA
So far this summer, stocks have continued their strong and improbable bounce-back since hitting their lows for the year on March 23rd. The S&P 500 Index has managed to claw its way out of a very deep hole and is now up 4% year-to-date. The Dow Jones Industrial Average, while still down 2% for the year, has nevertheless also made an impressive comeback since lockdowns began. Bonds have been strong as well, with the Fed lowering short-term rates to zero and actively purchasing both government and corporate bonds on the open market in an effort to keep yields (and therefore borrowing costs) low during this time of huge economic uncertainty.
“Don’t Fight The Fed”
An old adage on Wall Street, “Don’t Fight the Fed,” cautions investors not to bet against the Federal Reserve when it is acting determinedly and forcefully to get what it wants from the markets. Right now, the Fed is playing perhaps a larger role in the functioning of markets than it has for decades. While it is impossible to quantify precisely the impact of the Fed’s intervention in markets, our sense is that Fed actions have had a powerful effect in supporting the valuations of both stocks and bonds as well as aiding liquidity and bolstering investor confidence. In an economy in which unemployment stands at 10% and output has shrunk dramatically in recent months, many investment strategists are scratching their heads as they try to reconcile optimistic equity prices with today’s sobering economic realities and future uncertainties. It is hard not to perceive something of a disconnect right now between markets and the real economy. But markets look forward, not back, and valuations seem to be pricing in a robust recovery in 2021.
Finding A Path Forward
In our view, the path forward for markets depends heavily on two factors: progress on a vaccine and the effectiveness of government support for the economy to bridge the gap until a vaccine is available. At the moment, scientists appear to be making swift progress on vaccines for Covid-19. Currently twenty-nine vaccine candidates are in human trials around the world. This multiple shots on goal approach will likely yield some effective vaccines, but health officials predominately believe that Covid-19 is likely to continue to circulate in the human population for the foreseeable future and a smallpox-style eradication of the virus is unlikely.
As the benefits from the initial government coronavirus aid programs tail off, there is growing urgency for more government support for those millions of workers whose lives the virus has impacted, many of whom will be unable to make ends meet this fall. Strong measures from the Federal government to bridge the gap until the widespread availability of an effective vaccine would probably be well-received by investors, as it is better (and ultimately cheaper), in our view, to do what it takes to contain economic damage in the near term than to try to reconstruct a wrecked economy later.
As always, I welcome your comments and feedback. Feel free to call or email us to discuss your portfolio or the markets.
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