Fixed Income Investors Are Pouring Into The Stock Market

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Fixed Income Investors Are Pouring Into The Stock Market

In his Daily Market Notes report to investors, while commenting on fixed income investors, Louis Navellier wrote:

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Q2 2021 hedge fund letters, conferences and more

SALT New York: Canyon, Mudrick, Fortress And Sculptor On Finding Distressed Value

At the 2021 SALT New York conference, which was held earlier this week, one of the panels on the main stage discussed the best macro shifts coming out of the pandemic and investing in value amid distress. The panel featured: Todd Lemkin, the chief investment officer of Canyon Partners; Peter Wallach, the managing director and Read More

Fixed Income Investors Rush In

August is off to a great start as wave after wave of better than expected quarterly earnings continue to propel many stocks higher.  However, the biggest news is that the 10-year Treasury bond decisively fell below the 1.2% level, which just causes fixed income investors to pour into the stock market seeking higher yields.  Specifically, millions of new investors have poured into the stock market thanks to Reddit, Robinhood, and frustrated fixed income investors that are increasingly seeking high dividend yields due to the collapse of bond yields.  There is no doubt that these new investors have helped to propel the overall stock market substantially higher.  Since most investors do not know that the Fed has embraced Modern Monetary Theory (MMT) and the Federal Open Market Committee (FOMC) will keep interest rates ultralow, so I expect millions more new investors to pour into the stock market seeking high yields.

The Federal Open Market Committee (FOMC) shrugged off fears about the economic impact of rising pandemic cases and maintained the course Wednesday by keeping interest rates between zero and 0.25% through 2023. The Fed will also continue its quantitative easing program of $120 billion per month. Specifically, it will continue to purchase $80 billion in Treasury securities and $40 billion in mortgage-backed securities. The FOMC also noted the economy has continued to grow and maintained that recent high inflation is temporary and will recede once issues related to a clogged supply chain, prices for specific goods (like used cars) ease and normal economic demand returns.

The Fed is essentially refusing to fight inflation until the 6+ million jobs lost during the pandemic are restored.  Unfortunately, the labor force participation rate has fallen approximately 2% and it is possible that many workers opted for early retirement.  However, there are other unsolved mysteries, such as why about 20% of people in their 20s are not in school or working.  There are definitely some severe disruptions, especially in education.  Essentially, the Fed is taking its Congressional unemployment mandate seriously and wants to solve the missing 6+ million job dilemma before even discussing tapering its quantitative easing.

The Goldilocks Environment Of Low Interest Rates Persist

So this all means that the “Goldilocks” environment of low interest rates and an accommodative Fed persists.  Due to a strong order backlog from supply chain glitches, I expect the U.S. economy will continue to grow at a 6% annual pace in the third quarter and that sales as well as earnings momentum will decelerate gradually.  It is imperative that consumer spending and confidence remains strong, especially as the holiday shopping season approaches.  Overall, we still remain in an impressive economic recovery.

The fact of the matter is that the U.S. economy is now larger than it was pre-pandemic, helped by government pandemic aid and consumer spending. Indeed, inflation and continuing port bottlenecks has helped spark consumer demand, so GDP growth is expected to remain strong through the third quarter. In fact, in July, consumer confidence increased to the highest level since February 2020.

Speaking of recovery, China’s purchasing managers index slipped to 50.4 in July.  Since any reading over 50 signals an expansion, I do not think we should be too alarmed.  China’s economic output remains strong, which is why the containership bottleneck persists.  There are reports that the Covid-19 Delta-variant has impacted China, but so far, Chinese government authorities are not transparent.

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