The Stock Market: Even More New Historic Highs

Summary

• By the end of the week, the stock market had recovered what they lost earlier in the week and even closed at new historic highs.
• Analysts looked around to find narratives that would justify the higher stock prices, but nothing seems to be as important as the policy actions of the Federal Reserve and Congress.
• The leadership in the Federal Reserve and in the federal government seem intent upon, if anything, erring on the side of too much stimulus than too little.
• This should continue to be positive for the stock market in 2021, but investors must realize where the market value is being created and it is not coming just from the individual companies.

Didn’t look like it was going to happen this week... but, it did.

The Dow Jones Industrial Average and the Standard & Poor’s Stock Index both closed at new historical highs on Friday. The Dow closed at 33,072.88 up 0.2 percent from the previous high of 33,015.37 achieved on March 17, and the S&P closed at 3,974.54, up 0.01 percent from its close on March 17.

Joe Wallace and Gunjan Banerji assess this week’s move in the Wall Street Journal, by claiming that “A rally that included shares of banks and energy companies helped push the S&P higher on Friday, giving the index weekly gain to end a volatile stretch.”

Stocks have struggled over the past week as investors have had to deal with the uncertainties going on in the world, the falling numbers connected with the pandemic, the seemingly stronger economy, the possibilities for inflation taking off, and other such things.

And, so investors have shown some lack of conviction and the markets have reacted with some volatility.

But, What About The Fed?

Underneath this all, the one main factor that appears to have not changed is the stance of the Federal Reserve System.

The Federal Reserve gives every indication that it plans to keep its foot on the gas pedal. Fed Chairman Jerome Powell has talked this up in the U.S. Congress this past week as he and Treasury Secretary Janet Yellen testified about the state of the economy and what they were trying to do about it.

The Federal Reserve’s vice chair, Richard H. Clarida, has also been out on the road this past week defending the Federal Reserve's position and also taking on several economists, like former Treasury Secretary Larry Summers and Olivier Blanchard, former chief economist of the International Monetary Fund, for their concern over the issue of inflation getting out of control.

And, right now, the federal government has just passed a $1.9 trillion stimulus bill to drive on the economy and is in the planning stage of another piece of legislation that would pump some $3.0 trillion into the economy to improve the infrastructure of the country, help out education and students, and provide other sources of spending that would filter out into the economy.

There is a lot going on with a lot of money being channeled into the economy. There are, however, some questions about where all the money is going and whether or not this stimulus will, in fact, really help spur on the economy, or, will it just result in a rise in asset prices, like stock prices.

What About Various Sectors?

The impact of the government’s stimulus programs can have a substantial macro-economic effect on the stock market and drive the market as a whole, but investors still have a concern about what is happening in the various sectors of the market.

One beneficiary of the recent move in the stock market has been the rise in the shares of major banks. For example, on Friday, the price of Bank of America, Corp. (NYSE: BAC) stock rose by 2.6 percent and the price of Citigroup, Inc. (NYSE: C) rose by 1.6 percent.

One reason for the stock prices of large banks to rise at this time is that on Thursday, the Federal Reserve removed the temporary limits on bank dividend payments and on share buybacks beginning on June 30.

Another sector that is getting some attention because of current events is that of technology companies.

The problem here is that longer-term interest rates have risen in recent weeks and this is taken as a problem for the tech industry because so much of their profit is expected to come in the future and not in the near term. Higher longer-term interest rates mean that the rates used to discount these cash flows will result in lower valuations,

And, if inflation does, in fact, get worse and if inflationary expectations do rise, nominal longer-term bond yields will continue to rise, further hurting the valuations given to tech stocks.

In addition, the higher market yields in U.S. markets are helping to keep or attract foreign monies in U.S. markets and this seems to be having an impact on the value of the U.S. dollar. Over the past week or so, the value of the dollar has become stronger and this stronger dollar, along with the “growing strategic rivalry between the U.S. and China” will cause global supply chains to become even more strained, thereby hurting company performances.

There is a lot that is going on beneath the surface of the whole market. And, investors must be cognizant of what is going on at the micro-level of the markets.

But, investors must not forget what is going on in terms of the whole market. And, it looks as if the Federal Reserve is going to continue to be the underwriter of the stock market as a whole.

Ultimate Results

The current policy makers in Washington, D.C., seem to be very concerned about economic events getting out of their control, which would result in a much more severe economic downturn. Because of this, these policy makers are very willing to err on the side of too much economic stimulus than to run the risk that they might run short at some time in the future.

Thus, the Washington policy makers are willing to act on the side of fiscal and monetary ease and run the risk of too much inflation. As a consequence, as I have written about many times before, these government officials are willing to accept the continued rise in household net worth to its highest level in history, but also to accept the fact that the income/wealth inequality in the country has also risen to historic highs.

These just seem to be unintended consequences that accompany the fact that the Washington policy makers are keeping from erring in a way that would increase the chances of the economy going into a serious economic collapse.

The results of this policy making are very clear, however. The stock market continues to hit new historic highs. And, if things continue as the federal officials hope they will continue, the stock market will continue to hit even more new historical highs. Some sectors of the stock market will do better than others, but in general, given this kind of government support, the stock market, as a whole, should continue to rise, bringing on new records for household net worth and bringing on new records for income/wealth inequality.

So, what side do you, the investor, want to be on? Research, that I have cited in earlier articles, show that more and more individuals are taking this information to heart and putting their tax refunds into the stock market. That is, whereas in the past, just the wealthiest took advantage of the Fed’s underwriting of the stock market, today, this process has evolved to where more and more people with a lesser income are seeking to participate in the rising stock prices.

And, that may be why stock prices continue to hit new, higher and higher historic levels.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.