Countdown 62 Day Election

California 32 days until early voting

STOCK MARKET SURGE  

On March 23, 2020 the markets hit the bottom in the greatest market decline in history. The Market turn around was on the day when the Fed announced their first ever round of large purchases of assets, corporate and municipal debt, and interest rate depressing moves.  As a result of the massive influx of cash the markets surged.  The market has recovered as a result and increased 7% in the past month.  The stock markets hit record highs in August.  How you ask?

The stock markets have been good for wall street not main street.  Company’s CEO’s are stepping back to see how they can streamline their businesses during the Covid crisis, eying the reductions they can reap with work at home and having to pay less in rent, less overhead, and with fewer employees and how much capital expenditures they really need.

The mystery is high stock price Why are the markets so high when the economy is struggling and unemployment is so high?  In the 2009 great recession that began under Bush, the stock market followed jobs in a Vee shaped recovery which took 3-4 years. The 2009 market upturn anticipated the job recovery and when jobs began to come back the recovery began.

Today, however the Federal Reserve (Fed) has reduced interest rates to near zero and flooded the market with liquidity during this time.  This makes alternative investments such as stocks yielding much higher returns than high quality debt.  For example the dividends given out by the S & P 500 yield is 1.7%.  AA rated Corporate Bonds 1.5%.  10 year Treasuries 0.7%.  5 year Certificate of Deposit (CD) yield is only 0.5%. And a money market account yield is 0.1%,  So as you can see the money follows the highest yield on investments,  This also follows the liquidity, if you can borrow at near 0.0% and can make big money on margin in the market.  (Source for the data S&P 500, ICE indices, Federal Reserve data, and Bankrate,com from late August, 2020)

It’s not so much of Trump’s policies that have buoyed the market but the actions by the Fed that are without precedent.  I feel the actions of the Fed are nothing more than the accumulation of future debt.  The liquidity comes at a price, and is that price a delay in bankruptcies?  There are currently 40% of small businesses are failing.  Unemployment is still below what it was in January and will take years to recover. 

The stock market is not the economy.  This I must reiterate for those that think just because their 401K is doing well the economy is doing well, look again.   Will those still say that when your parks are filled with the homeless evicted from their apartments and those foreclosed on their properties, and soup kitchens  Covid medical bills and unemployment will continue the misery for those without jobs, without a 401K, and are uninsured, and are at the margins.

Those capable of employment and are still unemployed amount to over 30 million individuals.  Labor statistics for the month of August will come out this week.  Quarterly data is also due this week showing third quarter data.  I will be curious what the consumer price data shows since the economic advisors said they were unconcerned by inflation.  That says to me that they don’t care about those at the bottom end of the economy struggling with what they have and can‘t afford higher prices.

The conundrum for the administration is higher interest rates will curb the inflation pressures on goods and services, however, it will hurt the stock market and those with large mortgages tied to market rates and those with high debt in the Trump’s and Kushner’s business.  So which way does the administration’s actions veer?  To hell with higher inflation that hurts those at the bottom of the economy if it hurts the stock market and causes wealthy borrowers any pain.