There are several theories about why the stock market continues to perform so well. Many of them are focused on the upcoming election but too often those theories are driven by political bias and conjecture. As we saw back in 2016, market players are not particularly good at forecasting how the market will react if a certain candidate wins.
The market strength is likely caused by two main factors. The first is the ongoing flood of liquidity. Not only is there a very high likelihood of more fiscal stimulus at some point but the Fed assures us that they still have flexibility with monetary policy to boost the economy. The Fed would like to boost inflation and they are working hard to do that.
In addition to this giant wave of liquidity there continues to be promising economic signs. Goldman Sachs put out a report yesterday entitled, “The Surprisingly Limited Scarring Effects from the Pandemic Recession”, in which it states that most business closures have been temporary and that there is a surge in new business formation. It also notes that “labor demand has rebounded much more quickly than the last cycle”.
Goldman’s upbeat view of the economy is at odds with the narrative that is being used to try to defeat Donald Trump. You can’t win an election by admitting that conditions are better than expected. This has helped to create a tremendous wall of worry that the market is now climbing.
As the market continues to trend higher and the economic news isn’t as bad as many want to believe it is then that idle cash on the sidelines starts flowing into the market. Some justify their buying by claiming that the market is anticipating the favorable impact of higher taxes and a different economic strategy. Maybe, but if the economy was as bad as it is being portrayed the price action would likely be much different.
The good news from a market standpoint is that this wall of worry dynamic combined with the high level of liquidity is likely to continue. It is highly unlikely we are going to see many headlines about how the Covid crisis is abating, how a vaccine will produce an economic surge, and about the resilience of the small business.
Regardless of the reasons why this market remains strong, it isn’t possible to dispute the strength of the price action. Many people are anxious to declare that it simply isn’t justified because of the poor economy but that is one of the reasons the rise in the market is very likely to continue.
I continue to remain very bullish and am focusing on stock picking. It is becoming more difficult as more stocks become extended but there is plenty of momentum and we can still find plays to catch a ride.
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