How far will the markets fall in the fall?

During the month of August, markets have continued to rise. There are many reasons markets’ have moved from pandemic levels in five short months. Confidence is high that a vaccine will come to market soon. Companies are adapting, and school and municipalities are easing back into activity. We’re certainly not all the way back yet, but a “return to normalcy” has begun.

The biggest factor in the markets’ recovery has been central bank policy, and here in the US that means the activity of the Federal Reserve. They have virtually removed the chance of a catastrophic outcome and effectively raised the floor for equity prices thus turning 2020 in to a winner for investors.

The Fed promised early on in the crisis that it would use all the tools in its bag to support the US economy and, ultimately, the markets. Its first action was the cutting of the fed funds rate to effectively zero over a two week period.

The second tool in the Fed’s bag was the resurrection of its bond buying program. The pledge to purchase billions in Treasury bonds and mortgage-backed securities each month and since early March the Fed’s balance sheet has grown from $4.2 trillion to about $7.0 trillion. The surge in money supply has pushed interest rates lower for bond products. Coupled with a big decline in spending on goods and services due to the pandemic, there was pent up investor demand staring in April, and investors were looking for a return. With interest rates so low, stocks were the only game in town.

Some analysts, have worried that the recent surge in equity prices highlights a disconnect between the markets and economic fundamentals. Although the economy is clearly headed in the right directions, economic reports remain mixed. Another concern of ours has been the fact that big gains have been concentrated in a few tech giants. The FAANG stocks are up more that 75% year-to-date on average. Price/Earnings ratios are quite high now. Are we going to get a profit surge, or is this market growing into a “bubble?” We think its somewhere in between, which indicates potential volatility, but no new bear market.

Although there is anticipated continued volatility there has been a recent pullback so far in September, if you’ve got too much cash making nothing, and the probability of stocks being a much better long term opportunity, you may want to consider getting it working for you.