We are still in the middle of a pandemic. Statistically, the economy is headed for the worst quarter that we have had since the great depression. So many people have been affected and so much damage has been inflicted on businesses, with some industries expectedly to face hardships for years to come. Yet, the markets are having a very good run. The most frequently asked question by our clients is “why is the market doing so well”? Here are some possible reasons and explanations to answer that question:
- All time low interest rates brought about by the Federal Reserve; These rates are designed to spur economic growth since borrowing is cheap. They also serve to motivate investors to invest into equity markets since there is little return available for safe money.
- The increase of money supply into the economy, also triggered by the Federal Reserve; This massive amount, also known as the M-2 money supply, has provided excess liquidity, and has helped to stabilize businesses. While the supply of money is expanding rapidly, some of it has found its way to the equity markets. Notably, there is concern that this action by the Federal Reserve may create inflationary pressures within the next few years when the economy heats up.
- More data on the virus itself which indicates that in most areas we have flattened the curve and are on the downward side. The preponderance of cases has helped us understand more about the virus’ true nature and degree of contagiousness. The actual results, while large, versus the original models indicate that the virus has not been as devastating worldwide as originally predicted. Our nation is better prepared than before to help treat those who become infected. Also, we have identified the groups most vulnerable and at-risk. In general, people are becoming more confident, with waning fear across large segments of the nation.
- Positive news regarding potential vaccines as well as anti-viral treatments; To a degree, this has lifted the markets.
- Economies and businesses are starting to gradually reopen again although at a different pace depending on the state or municipality. The good news, as of the date we are writing this, there has not been a spike in new cases, hospitalizations, and deaths in the states that have reopened.
- It is now the beginning of summer. Historically, coronaviruses weaken or die out when exposed to sunlight, heat and humidity. So far, this is holding true for Covid-19.
- Investors seek to invest in individual corporations and their future potential earnings and not in GDP or unemployment numbers. Many people do not understand that there can be a disconnection between evaluating macroeconomic vs microeconomic (corporate) data points. Remember that although the economy has faced immense challenges and virtually shut-down, some industries, sectors, and companies continued to operate and did quite well
- Market recoveries tend to start 3-6 months ahead of economic recoveries. We remind you, as we have for months, this happens because investors are generally forward thinking and anticipating what is likely to happen in the future.
We are all aware that there will be challenges ahead. We are compassionate people who care for each other. Many people have suffered and died, and we are so sympathetic. The virus is still with us and could reemerge. We have dramatically increased our debt burden going forward, which is not good. Alas, the economy has a long recovery ahead. As a nation, we continue to learn. State and local governments may mandate additional forms of testing and change public health policies which may both reveal new trends and inertia behind recovery. It may indeed take years to return to where we were in February of this year.
If the virus and lockdown were not enough, the heightened emotions and series of events associated with the tragic death of George Floyd has magnified the fear, uncertainty, and anger across the nation. It has been followed by senseless violence and looting in many parts of the country, sadly destroying businesses and communities, and slowing the economic recovery process. Again, our sympathies go out to the many suffering families and communities with hope for justice and peace.
The United States of America is very resilient and will bounce back. There is an entrepreneurial spirit and work ethic that will lead the way as it always has! So many of us have learned more about ourselves in the last few months than over many years! We persevere and will be better prepared for future outbreaks. This has also brought out the best in people who have helped so many others survive this chaos. We are so grateful to those wonderful people and this great country! Stay positive!
Barry E Moschel, Partner, RICP®, CLU®, ChFC®, CPA
Adam L Schwartz, Partner, CFP®, NSSA®
Tom Manno, CFP®