Update June 2020
Financial Market Update
Volatility is back! Last week the stock market suffered one of its worst declines in months leaving many investors questioning if the rally from the March lows has come to an end. Prior to this sharp drop stocks had been consistently marching higher and higher leaving many investors perplexed as to why. After all, consumer confidence remains low, corporate earnings are projected to collapse 30% or more in 2020, and unemployment is over 13%. Couple this with an escalation of geopolitical pressures abroad and racial tensions here at home and you seemingly have a perfect storm for financial market Armageddon. Admittedly, we did have a very encouraging employment report come out recently with 2.5 million jobs added in the month of May, but by no means does this suggest we are out of the woods yet. Thus, given the lingering economic concerns what could possibly be supporting stock prices near record highs? Enter the Federal Reserve.
We normally like to keep these updates void of too much economic theory, but to explain what is going on we are going to provide some context of what appears to be driving financial markets at the present time. While we are all aware of the economic difficulty so many Americans are currently facing, the response by the Federal Reserve has investors confident a prolonged downturn will not happen. David Rosenberg, of Rosenberg Research, summed it up perfectly in a recent research report to clients, “… statistically speaking, the correlation between the equity market, and the Fed balance sheet has now crossed above 90% over this interval (the stock market bottom until now), even greater than the already-intense relationship during the 2009-2013 era of ever-expansive QE (quantitative easing). The correlation between the S&P 500 and the real economy over this interval is close to zero.”
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