Friday, November 20th, 2020
“Why Stocks Keep Going Higher”
As we anxiously await vaccine distribution, especially for those most at-risk, the virus continues to wreak havoc. COVID-19-related hospitalizations have skyrocketed higher in recent weeks, and even though patient treatments have improved significantly since March, the pressure on our medical system continues to become more dire by the day.
Despite all that, the stock market continues to trade near all-time highs. Are investors just whistling through the graveyard?
We cannot definitively say why the market has so easily brushed aside the bad news of late, but we do know that stocks are forward-looking. And we have to assume that six and twelve months from now, things will look a whole lot better. Even though cases and hospitalizations are worse than they were at the end of the first quarter when stocks shed a third of their value, there is much higher certainty on an imminent resolution that was absent at the onset of the crisis.
Imagine next summer when restaurants are potentially not restricted on capacity, families can go on that long-awaited vacation, and football stadiums are full and boisterous in the fall. It may sound overly optimistic, but that is a reality with the unprecedented fast-tracking and efficacy rates of vaccines from Pfizer, Moderna, and likely others to come.
Things do not have to be good in the moment for the market to look ahead to the other side of the crisis. A good portion of the services economy remains in limbo with many businesses and individuals anxiously awaiting a fiscal stimulus bill held hostage by not-so-anxious political leadership.
Even so, the intermediate trends in economic activity are sure to be directionally positive and will surely accelerate once economic restrictions subside.
Don’t forget that the Fed has committed to keeping rates lower for the better part of the next 36 months which means businesses and individuals can borrow cheap, along with the fiscal stimulus that has been and is likely further to be injected into the economy. The market is sniffing out the impact of this easy money on the intermediate, not short-term outlook for the economy.
One sector that has already benefited from low rates, and the urgency for families to exit the highly clustered cities for suburbs, is the housing market. Annualized existing home sales in October hit their highest levels since February 2006. Even better, first-time home buyers represented nearly 1/3 of October sales which tells us that millennials are starting to accelerate their purchasing activity.
This rebound in the housing market is something that we have mentioned a few times, but believe it is not getting enough attention.
Source: Calculated Risk
Housing and housing-related spending is one of the biggest drivers of economic growth. After a lost decade of spending, the market is as strong as ever. And the difference today vs. the housing bubble that popped in 2006 is that household balance sheets are in much better shape. Debt payments as a % of disposable income are at multi-decade lows.
Source: JP Morgan
It may be hard to look for the green shoots in an economy that is seeing unprecedented challenges, but that is what the stock market is likely doing. Easy money policy from the Fed, a consumer anxious to get out and spend with the aid of unprecedented stimulus, plus the tailwind of a robust housing market. There is a lot for the market to look forward to in 2021 that is perhaps being priced in today.
Jack Holmes, CFA®
WealthPlan Partners
Source:
- https://www.wsj.com/articles/home-sales-rise-to-14-year-high-in-october-11605798326
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future.