On one side we have market fundamentals. On the other, we have extremely accommodative fiscal and monetary policy.
The juxtaposed forces are at odds with each other and stock valuations are now at their richest valuations since the tech boom of the late 1990s and early 2000s. With corporate earnings all affected by the pandemic this has exacerbated the issue, driving the after-tax profits up dramatically since the end of the second quarter this year. And last week, on Thursday August 27th, markets got a bit of a reality check on the phenomenal rally that had been underway since the lows last spring.
This could pose a problem as valuations increase and the number of investors willing to pay rising prices for stock is tested. Technology stocks have been on a tear this year with standouts from Tesla and Apple leading the surge. Historically, these two stocks have had some consolidation after large run-ups that have led to stock splits, which, at the end of August both companies had. It remains to be seen if the selloffs in tech is a short-term sell-off, or a larger correction is in store. Some of the biggest tech names are up far above their average annual growth rates already.
On the other end of the market tug-o-war is easing monetary policy that gives incentive to stock investors to invest in stock as opposed to saving in interest bearing accounts. On Thursday, August 27, 2020 Federal Board Chairman Powell officially announced a formal change in how the Fed addresses inflation and unemployment, effectively indicating that the Fed plans to keep the target rate near or at zero for the foreseeable future. The FOMC Participant “dot plot” now estimates that rates will remain at or near 0% until at least 2022.
Easing monetary policy and quantitative easing (QE) were what fueled much of the last expansion cycle which ended with the COVID-19 crisis. This is a major stimulus to the markets and large corporations because it substantially eases their ability to obtain financing through open markets and gives incentives to stockholders to continue to hold stock, even with lower earnings.
Internationally the tug-o-war is a bit more complex as various bodies that govern other monetary policy have their own set of criteria that they are wrestling with. This market has many potential outcomes at this point, and we are still in the middle of the pandemic. What happens next could likely be correlated with whether any or all the treatments and/or vaccinations prove to be effective in stopping the virus to the point where global economies can really recover.
As with all tug-o-wars between powerful opponents, some might choose a side to cheer but the best case is often to look ahead and be prepared for any outcome. if markets become fixated on market fundamentals, the rally could lose steam and may even have a pull-back. On the other hand, we cannot discount the power of monetary policy in providing support to limit downside and even give reason for further market growth.
Are you and your strategy prepared in the event of changing tides within this market tug-o-war? Now may be a good time to talk to your advisor about any strategy that you are concerned with.
Investment advisory services are offered through Trek Financial, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek FG 20-115