The Disconnect between the Markets & Economy

4 Blogs on Long Short Equity StrategiesOne of the most puzzling market-related stories to come from COVID-19 is the disconnect between the stock market and the economic numbers.

The market would be much, much lower if it weren’t for the Federal Reserve’s actual and promised buying of credit assets (e.g., Treasuries, Investment Grade Bonds, BB junk bonds, auto loans, residential and commercial mortgages, credit card debt, etc). They have provided a floor to the markets that help companies raise money by selling bonds and to keep the foreclosure and repo man away from all the personal assets of people who just lost their jobs.

The stock market has bounced because of the Fed and Treasury activities and is up in anticipation that things will return to a more normal state. If the virus rises up again, the markets will get hit, but again, we know that the Fed has our back and will do whatever it takes to keep the credit markets stable. This is most important, but it does not come without a major cost. They are using your and my U.S.A. credit cards, plus those of our children to pay for this now. That means future returns will be lower and inflation will eventually rear its ugly head as we need to pay for all of this borrowing. This is why gold is now a much more interesting asset for everyone’s portfolios.

I would think that we would have a tough time making new highs here but since that is what many are thinking, the market will do its best to try and make us look stupid. But I do think we will continue to see volatility all year as isolated virus outbreaks scare us, ongoing worries about the Fall flu season, as well as all the supply chain and production glitches that are bound to hit as we restart things. Nothing will return to normal until there is a good vaccine and or widespread testing for this virus. And then whoever the next POTUS will be will have to deal with a significant contraction in Fed assets as they try and put the genie back into the bottle. That won’t be much fun.

I have seen many crazy things in my investing career, but this one ranks up there.

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