Stimulating The Economy Impacts Stocks, But Watch Your Portfolio Carefully In ’21

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Stimulating The Economy Impacts Stocks, But Watch Your Portfolio Carefully In ’21

The stock market is one of the benchmarks for every U.S. presidency. Voters often look at how stocks performed during a president’s four-year term as one of the criteria for re-election.

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Q4 2020 hedge fund letters, conferences and more

Here’s what Charlie Munger had to say at the Daily Journal meeting

Charlie MungerCharlie Munger spoke at the Daily Journal Corporation's Annual Meeting of Shareholders today. Although Warren Buffett is the more well-known Berkshire Hathaway chief, Munger has been at his side through much of his investing career. Q4 2020 hedge fund letters, conferences and more Charlie Munger's speech at the Daily Journal meeting was live-streamed on Yahoo Read More


The Impact Of The Pandemic On The Stock Market

But the reality is, the president has far less impact on the stock market than anyone thinks. Why? Let’s use last year’s somewhat surprising rebound of stocks – during the pandemic – as an example.

To put what happened in 2020 in perspective, we had the largest single-year contraction of GDP in the history of our country going back to the Great Depression, and yet the S&P 500 finished up over 15% and the Nasdaq was up nearly 40%. You had corporate bond issuance at an all-time high, and consumer income actually went up. All those things are historical; you’ve never had a “recession” where consumer income and corporate balance sheets both went up.

What you saw in 2020 is simply the impact of the government hemorrhaging record amounts of printed money into the system. I don’t think people realize the amount of money that was printed out of thin air. For 2020, you’re talking about 7-8 trillion dollars, between the Federal Reserve System’s special purpose vehicle, the bond buying, and a stimulus package.

So it was not a magic rebound of the economy. Overall it was only a temporary rebound, and it was simply a product of turning the economy back on.

The amount of cash that’s been poured into this market is mind-boggling. And if the Fed continues to do that, stocks will keep going up. If it stops doing that, they won’t. All that money injected into the system last year had to go somewhere. Part of it ran headlong into a stock mania that had been 13 years in the making, since the financial crisis of 2007-2008. It’s just gone ballistic.

The Fed will have to keep printing money at this point. It has basically painted itself into a corner. If it stops being accommodating, the whole thing will implode, and the Fed will get the instability it’s been trying to avoid since the financial crisis.

Cautious optimism

I think the stock market will continue to go higher, perhaps much higher. We’re in a position similar to Japan in the late 1980s, and for a lot of the same reasons. In Japan in the late 80s it was referred to as window dressing, mandating that banks had to lend to corporations. And that was the biggest driver of their bubble.

That’s much the same as what the Fed is doing now. It isn’t mandating lending, but it’s buying corporate bonds as part of the CARES Act, which was approved early in the pandemic. The idea is to backstop corporations and their employees. The buyers of those bonds are lending those companies money. If you’re buying debt on the open markets vs. mandating lending, the outcomes are very similar.

When you look at comparative peak valuations – valuation being the analytical process of determining the current or projected worth of an asset or company – it’s interesting. Japan’s stock market back in the 80s was valued at two times where we currently are. I think the upside for us is potentially really big. But having said that, if you look at valuations on a historical basis, anytime we’ve ever been close to this level, you have seen massive selloffs and horrible 10-year returns from the futures.

There is no exception to that rule. So if you look at where we’re at in terms of valuations and compare it historically, the rate of return on the market should be somewhere between negative 2% a year to 0% a year for the next 10 years.

The only two times we’ve had valuations anywhere close to this were in 1929, when the markets dropped 85% over the next two years, and ‘99, when the Nasdaq dropped 85% over the next two years. I don’t think a selloff that dramatic is going to happen again because of the underwriting by the Fed and the US government.

The higher the stock market goes, there’s a natural inclination of some to panic in advance of a big collapse. But I think security is as simple as staying diversified in your portfolio. Meaning, investors need to get out of bonds and find bond alternatives, those that are insured against loss and don’t have a fee.

It’s important that investors across the markets take a long-term perspective and quit focusing on the short term. Stay disciplined and diversified and start looking more at the value side of things. There are a lot of great companies out there that have been overlooked because they’re not tech, and they pay nice dividends.


About the Author

Zach Abraham is principal/chief investment officer of Bulwark Capital Management (www.bulwarkcapitalmgmt.com/our-team). He has been in the financial services industry for over a decade. Abraham got his Series 7 and 66 while working for Wells Fargo as a financial advisor. Before starting Bulwark, Mr. Abraham served as chief investment officer for Abraham & Co., Inc., a boutique broker/dealer and wealth management firm. He is host of the show “Know Your Risk Radio” on AM 770 KTTH.

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