Market Pulse: Catalysts why bull market will continue
While the market has surged since the March low, valuations for most stocks (ignoring the high momentum names) are reasonable given record-low interest rates and the likely economic and profit outlook, which many are underestimating.
There are other reasons pointing to higher prices still.
A key catalyst is one I’ve mentioned before. That is the amount invested (not quite the right word) in money-market funds. That number is now $5 trillion and will likely grow as congress and the Federal Reserve pump more cash and liquidity into the system. This will be the fuel for a future rally.
Cash is money out of harm’s way, so it serves a purpose, especially in volatile markets like ours. But one purpose cash cannot serve now is to generate income. Savers have been a suffering class for years, settling for ever-lower yields in traditional income investments.
I well recall drawing the line years ago on preferred stocks, buying only those with yields above 7%. There were many…until there were none. Then I lowered the line to 6%, but investment-grade issues with that yield became scarce, too, then disappeared. Hello 5% or less. One approach has been to compromise on quality with lower-rated issues and to some degree we have.
The logical and perhaps only course for long-suffering investors is to turn to stocks for income, given the alternatives. That is one reason profit-taking quickly runs its course, as we’ve seen again and again. People are buying the dips and putting money to work.
Wharton’s Jeremy Siegel agrees that investors and Wall Street are underestimating the economy’s strength in the second half and into next year and also future earnings. He believes they are not factoring in the speed with which a vaccine will become available, at least for high-risk people.
This week there was good news on the vaccine front from Pfizer and Moderna, which had very encouraging results in a trial. Every participant had antibody levels four times greater than those in people who had the virus and recovered. The next trial begins shortly and will include 30,000 patients.
Add it all up and you can see reasons why the bull market will continue. Trillions of dollars on the sidelines, a better outlook for a vaccine, double-digit GDP growth in the second half, and an estimated 6.5% growth next year. Yes, 6.5%. Too few investors are factoring that into estimates and are distracted by surging infections and their impact. For now.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Consult your financial advisor before purchasing any security.
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