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Why the market is up
July 29, 2020

Despite a slew of negative economic reports and meeting the official definition of entering into a recession, the stock market is up more than 40% from its March lows. Probably the most common question we receive is why is this decoupling of the broader economy from the equity market  occurring?  This phenomenon, which has left many people scratching their heads, is not as uncommon as one would expect from a historical perspective and has a myriad of underlying potential reasons.

Photo of Robert Mante

First Vice President
Amalgamated Bank
Director of Consumer Investments
Financial Advisor, Infinex Investments, Inc.

There are as many theories as to why the market has risen as there are pundits on television trying to formulate a reason. Some market participants believe the quick bounce back is the result of a soon to be experienced V-shaped economic recovery. This view is formulated around the idea that once the virus has passed, or a vaccine is created, we will spring right back to where we were before. The stock market has historically been a leading indicator, meaning that it will peer into the future. Because of this, at times, advances or declines might seem disjointed from the current realities on the ground.

Volatility has also been compounded by a rush of new, younger investors. With sporting events (and the gambling that would normally be tied to it) shut down, a host of new risk takers have taken to “betting” on stocks. This is best exemplified by Barstool Sports’ (a sports focused website that heavily capitalizes on social media) president Dave Portnoy streaming his day trading account. These videos show Portnoy risking large sums of money on speculative stocks – often making or losing millions of dollars at a clip while chanting “stocks only go up.” This unique marketing strategy has led to a cult-like following for Portnoy and the gamification of investing.i The advent of new trading platforms and the lure of free commissions has thrust forward a new subset of investors who ignore fundamentals and long-established market truths to take a shot on riskier plays. A prime example of this behavior can be found in the stock of Hertz, which although recently filing for bankruptcy, saw its stock price increase nearly 7-fold even as the shares were expected to have no actual value.ii 

Another driver of the market increase is that profits of fast-growing technology companies and essential retailers have not been significantly hurt by the pandemic. Companies such as Amazon, Zoom, Walmart, Microsoft and Apple have all seen their earnings power unchanged or increased as a result of the shutdown. In fact, because it is a market cap weighted index, 21.7% of the S&P 500 is concentrated in the top 6 technology stocks, which has driven much of the positive performance.

Our vote for the most significant driver of the markets rise is best described by an old a quote of Marty Zweig – “Don’t fight the Fed.” The Federal Reserve’s actions combined with the stimulus package and PPP loans have injected a huge amount of liquidity into the system. One could equate the Fed’s normal response to past bear markets as a trickle, while this time they have unleashed a flood. The Fed announced a massive injection of liquidity on March 23rd. Coincidentally the market started its ascent on that day.iii

These actions have pushed interest rates to record lows, turning money market funds, bonds and other fixed-income instruments into historically low returning investments. The S&P 500 currently has a higher yield than 30-year treasuries.iv This led to a TINA (There Is No Alternative) mentality. If an investor wishes to make a return, they must turn away from the traditional fixed income asset class and increase their equity exposure. In return they are not only getting (in many cases) a higher yield, but also the chance for appreciation. The Fed has further indicated that they will do all they can to prevent the market from unraveling. They crossed a line unthinkable six months ago and began buying both fixed income bond ETFs and as of recently, individual corporate and municipal debt.v This served to comfort the market and set the stage for gains as the awareness set in that the Fed would stop at nothing to stabilize markets ahead of an election year.

As the market rose, FOMO (fear of missing out) overtook the panic that existed at the market depths. Investors reached for and chose to play the only game in town that was open. While no one knows what the short-term movements of the market will bring for the next quarter or year, one truth remains -  a well-diversified and thought out investment plan has stood the test of time over various market cycles. If you would like to ensure that your current plan is on target and aligned with both your values and risk preferences and capacity, please feel free to contact us to take advantage of a portfolio review.

 


Learn more and check the background of our firm and investment professionals at FINRA's BrokerCheck.
Investment and insurance products and services are offered through INFINEX INVESTMENTS, INC. Member FINRA/SIPC. Amalgamated Investment Services is a trade name of Amalgamated Bank. Infinex and Amalgamated Bank are not affiliated. Products and services made available through Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value.

 

i https://medium.com/@thomasjaywilliams/dave-portnoy-stocks-only-go-up-f0a9f5fb37d1

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