The Stock Market: Growing Clouds
Summary
- The stock market closed up for the month even though prices were down this past week: and the market remains very near historic highs.
- The U.S. economy seems to be accelerating, but concern has been rising about rising Covid-19 action in India and other places in the world that might threaten continued U.S. expansion.
- Furthermore, there is rising concern that the Federal Reserve will not maintain its purchase of $120 billion of new securities every month as real inflation threatens in the background.
- Radical uncertainty still clouds the future.
Stocks closed down for the week, but still near historic highs. For the month, a strong showing.
For the month of April, the Dow Jones Industrial Average showed a gain of about 897 points closing at 33,878; the NASDAQ index moved up around 776 points closing at 13,963; and the Standard & Poor’s 500 Stock Index rose by about 208 points, ending at 4,181.
The S&P hit 10 new historic highs during the month, the last one coming on April 29.
The Dow Jones hit 4 new historic highs during the month, the last one coming on April 16.
The NASDAQ index gained one new historic high, that date being April 26.
Reasons given for the strength of the market: first, signs that the economy is going to have a relatively strong recovery in 2021; and the Federal Reserve and the federal government. are pumping lots and lots of money into the economy.
On the other side, there is major concern over the worsening of Covid-19 cases worldwide and the concern that the supply chains and other economic relations are going to hinder any real global growth. In addition, there seems to be growing concern about the possibility that the Federal Reserve will begin to taper its security purchases and will be unable to keep interest rates from rising.
The Bigger Picture
Source: FactSet
The United States economy continues to show signs that it will produce a relatively strong showing for 2021. Over the past week or two, the earnings reports of corporations have been quite robust. Real economic growth came in with a 0.4 percent year-over-year increase. U.S. household income surges in March, rising by a historic 21 percent.
However, there seems to be bad news from around the world with respect to the Covid-19 spread. In India and Brazil, the numbers are way up. Furthermore, there are signs that the Chinese manufacturing sector is not doing well. And the eurozone seems to have slipped back into a second recession.
The government stimulus situation is one of growing mixed messages. The Biden administration is on the verge of expanding “infrastructure” spending at a record pace, which follows the earlier $1.9 trillion stimulus package already passed. Fed Chair Jerome Powell still talks of the support the Federal Reserve will give to make sure the spending package will succeed.
The Federal Reserve has added almost $500 billion of additional securities to its securities portfolio since the end of 2020 and the “excess reserves” in the commercial banking system now totals almost $4.0 trillion.
Yes, that number is in the trillions!!!!
The Federal Reserve has been the major driver of the stock market since the end of the Great Recession and made a special effort when the coronavirus pandemic hit early last year generating an economic recession, to pump up the banking system so as to avoid a major financial collapse.
As a consequence, the stock market went up and up and up, hitting numerous new historical highs. The financial market's confidence that the Fed will be pumping money into the economy has been a major force in the historical run the stock markets have made over the past decade.
Now, however, there is growing concern over just how much longer the Fed can keep up what it has been doing. The Fed is currently adding $120 billion new securities to its portfolio every month. This is a huge amount.
Caitlin Ostroff and Akane Otuni have written in the Wall Street Journal that concern is growing that any sign of increasing inflation, which seems to be a real possibility, might lead to the Federal Reserve beginning to “taper” its purchases.
The fear is that any “tapering” will change the scene. That is, the Fed has, in a sense, created its own dilemma. The signaled purchase of $120 billion purchases a month added to the confidence of market participants in providing a belief that the Fed would not let the stock market's decline.
Now, the purchases are going to have to slow down… and stop… one of these days. How does the Fed move to a “tapering” position without sending concerns through the market? How can the Fed do anything that looks like it is “pulling back” without setting off some kind of reaction?
Things To Watch
First of all, there is the fear of growing inflation. With all the liquidity around, how are businesses going to hold back from getting some kind of price increases out of the situation. Furthermore, there has already been a rise in commodity prices that seem to be leading the way. Look at the prices that have already shown a major rise this year: copper, lumber, and energy. How are these rises going to be stopped?
Second, there has been a significant fall in the value of the U.S. dollar in the foreign exchange market. This decline has paralleled the rise of Joe Biden to be president and has continued as Mr. Biden continues to build up more and more stimulus to the economy.
Third, investors in the U.S. are moving into cash at the fastest rate since March 2020. “Data from fund flow tracker EPFR showed investors moved $57.3 billion into cash in the week to Wednesday.”
This was the largest move “since the market turmoil of last year when the coronavirus crisis gripped markets and the S&P 500 blue-chip share index lost a fifth of its value during March.”
Bank of America strategist David Jones argues that investors were now “positioning for inflation and tapering.” Some analysts stress that this money may be moving into commodities and bonds. The argument here is that these outlets are the play in the next stage of the economic recovery.
Going Forward
One cannot stress enough the need for investors to be cognizant of what is going on in the markets, remaining flexible for significant changes.
The situation is one of radical uncertainty. Yes, the Federal Reserve has been supportive of the stock market for the past ten years or so, and investors that have “played the Fed” have done marvelously well.
But after ten years, is the economy nearing a position where this will have to change?
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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Comments (19)
Does Powell speak regularly with Ron Klain, the Presidents' string puller, of going bold..rhetorical. The feeling is growing that the path economic prosperity can't be bought with "funny" money. The fact is anyone who has been on this planet for many decades has been living under the impression that capital has to be earned, not just handed out.
Political actors are embracers of the new religion..MMT.
Yet, we sit in the grandstands knowing in our being..this may not end well.
