After the best week for the S&P 500 since 1974, stocks closed near their highs Friday, buoyed by last night’s unveiling of the White House’s plans for a three phased economic reopening and encouraging trial data around a potential coronavirus treatment called remdesivir. As a result, the S&P 500 rose another 3% this week despite a very healthy amount of skepticism in the sustainability of this rally. While we share some of that skepticism as this week’s economic data, ranging from manufacturing to housing to the labor market, were all historically bad, is it very noteworthy that stocks have largely been undeterred. Perhaps the most striking example of this phenomenon can be observed over the last four Thursdays when jobless claims reports have cumulatively shown that over 22M Americans have filed for unemployment in roughly a month. How did stocks respond to such shockingly bad unemployment figures? The S&P 500 actually rose on average over 2.6% on those very same days!
What then is driving much of the market’s resurgence and allowing investors to look beyond terrible economic data? It is impossible to attribute exactly what is driving valuations, especially with so many factors currently at play, but we believe investors would be wise to pay attention to the Federal Reserve’s balance sheet (see chart below). In a little over a month, the Federal Reserve has flooded the economy with liquidity and the Fed’s balance sheet has expanded by over an eye-popping $2 trillion. The immediate policy response from the Federal Reserve at the start of the financial crisis in 2008 pales in comparison and today the Federal Reserve balance sheet is almost 30% of the size of the US economy prior to the emergence of coronavirus. A larger discussion about the longer-term implications of this unprecedented monetary policy response on moral hazard is well deserved, but right now the US central bank appears to be redefining “Don’t Fight the Fed” and the market appears to be listening.
Ian Browning | Director, Investment Strategies & Shareholder
Peter E. Simmons | President & CEO