US Stocks and US Markets Continue to Lead
The recovery in the United States financial markets continues, and the NASDAQ market is now positive for the year and is close to retaking the 9,000 level(see chart below). Most on Wall Street and Main Street are asking how is that possible, given all the negative economic news and the lack of economic activity because of the global pandemic or COVID-19 crisis.
Upon reflection, I see three possible reasons why stocks continue to recover in the United States and I do think the rally may continue for a while longer due to these three reasons. First, the Federal Reserve acted quickly to add liquidity to the market and reduced interest rates to or near zero, making the bond market expensive and fixed income investments less attractive. Second, investors are experiencing FOMO or fear of missing out, they see the rally and want to participate and not miss the upside. We can tell this is happening because the VIX Index, or the fear gage as some call it on Wall Street has dropped to near 30. The VIX index hasn’t been this low since the market turmoil started in haste in early March. Finally, and most importantly, I think the market is telling us something about earnings. The market is predicting the earnings recovery for companies may be in fact faster and quicker than most expect. Companies may figure out how to do more with less and wait to add back overhead. This means more earnings will drop to the bottom line more quickly and investors and stocks love that. This also means that the unemployment rate may stay elevated for longer. Where this argument losses steam is consumers make up two thirds of all economic activity so if consumers aren’t working, they aren’t spending on goods and services either. It is possible that employment picks up quicker than expected too. Call me crazy, or right, or neither. You decide.
Enjoy your weekend and all the sunny weather expected in Seattle. Happy Mothers Days! Don’t forget Moms on Sunday!!!
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