The Stock Market: Another Week Of New Historic Highs
Summary
- The stock market keeps hitting new historic highs, with the Standard & Poor's 500 Stock index hitting its twentieth new historic high for the year.
- The movement of the stock market this year has been a general movement with almost everything moving up, a trend that encourages investment in passive investment vehicles.
- Analysts have tried to identify individual causes for why the stock markets have performed the way they have, but such a general rise in stocks seems to point one way.
- The Federal Reserve continues to do its best to keep the financial markets liquid and to support the stock market and the economy, and this seems to be the main factor behind the market rise.
For the last three weeks, I have written about the stock market and the new historic highs that have been reached during the past week.
Again, this past week, new historic highs were hit once again. What can be said?
On Monday, Wednesday, Thursday, and Friday, the Standard & Poor’s 500 Stock Index hit new historical highs.
On Monday and Friday, the Dow Jones Industrial Average hit new historical highs.
The Dow Jones new high on Friday was its nineteenth new historical high for the year. The S&P 500 recorded its twentieth new historical high for the year on Friday.
Index Performance This Week
Source: FactSet
Looking For Reasons
Caitlin Ostroff and Gunjan Banerji, writing in the Wall Street Journal attribute the new records are broad-based gains and can be associated with the massive government spending now going on and the success of the vaccination program against the Covid-19 virus.
The recent news coming out in the U.S. about employment and about manufacturing has been very encouraging. And, then the new economic forecasts coming out from the International Monetary Fund have just added fuel to the good news. The IMF sees the United States growing at a 6.4 percent annual rate for 2021 with the global economy growing by 6.0 percent.
Note that this would be the highest global rate of growth in the past 40 years.
James Mackintosh of the Wall Street Journal is looking deeper for reasons why the stock market is performing the way that it is. He, for one, believes that the market is moving in a counter-intuitive way, and so is looking for an explanation of why stocks are performing as they are.
To Mr. Mackintosh, the “massive” government spending and the vaccine successes that have contributed to the good economic numbers imply that investors should move more and more into riskier investments like ”small, cheap, economically sensitive stocks.” These investors should therefore move away from “bonds, big, bond like stocks and those (assets) that react strongly to interest rates….”
The fact is that in recent times, investors have moved in “the exact opposite” direction. As a result,
The mega-sized stocks beat the merely large, which beat the big, with the small stocks bring up the rear. Cheap 'value' stocks lagged more expensive growth stocks once again, with Big Tech firms… beating the S&P 500.”
Why he asks, has this been the case?
But Mr. Mackintosh does not seem to very comfortable with his more “micro” reasons, which tend to depend upon the actions of foreign investors or to the possibilities of inflation, or, as he refers to it, “reflation” rearing its head in the near future.
Don’t Forget The Federal Reserve
To me, the crucial issue for the stock market is the policy stance of the Federal Reserve.
Ostroff and Banerji introduce the element that I believe is driving the market these days. The authors report,
Federal Reserve officials reiterated this week that the central bank will continue with policy measures aimed to support the recovery.”
Right now, this seems to me to be the most important factor to the investment community.
The federal government is spending like crazy these days and the Federal Reserve encouraging, as well as underwriting the government’s actions. Borrowed money is driving much activity in the economy and we also see how borrowed money is "goosing up" the stock market.
The Federal Reserve is ready to do what it needs to keep the financial markets going and to get the economy rising at a more rapid pace than was achieved in the economic recovery following the Great Recession. And, Fed Chair Jerome Powell has stated many times that he is willing to err on the side of monetary ease in order to accomplish this goal
Note, one final thing. The rise in stock prices is a general market movement. Everything is moving, although as Mr. Mackintosh reports, it seems as if the “mega-sized” are moving the most, followed by everyone else. But value investing is not what most investors are doing. The “passive” investment route has become relatively more important to the current investors in recent years.
But note, much of the “mega-sized” firms whose stocks are moving represent the future, they represent high-tech. The world is changing and the spread of the coronavirus pandemic has been one of the major forces driving the change to the new world.
It seems as if investors are placing their bets on the “new world” order. I have noted earlier “that 44 percent of the most recent 1,000 point increase in the S&P 500 Stock Index has come from five stocks - Apple (AAPL), Microsoft (MSFT) , Amazon (AMZN), Facebook (FB) and Alphabet (GOOG) (GOOGL).” The 1,000 point increase noted is the move of the S&P 500 stock index from 3,000 to 4,000.
The Big Question For The Future
If my argument is true, then the most important question to investors is the one that has to do with the length of time the Fed will continue on with its current support. And some analysts are raising this very question.
My own opinion is that the Fed will continue to pursue its current stance. As I have recently written, II believe that Fed Chair, Jerome Powell, does not want to be known as the leader of the Fed during a period of financial crisis and so will continue to err on the side of monetary ease.
Thus, with the Biden administration pushing expense spending bills and the Powell leadership at the Fed promising to underwrite the Biden spending programs, it seems to me that the Federal Reserve will keep on supporting stock prices for quite some time into the future. And this is what investors will have to work with going forward.
This article was written by
Analyst’s 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.
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