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Market Pulse: Here’s why stocks are rallying

David Vomund
Provided

The S&P 500 is more than 30% above its March 23 low. A friend asked me how can it be that stocks are rising amid the daily onslaught of bad news? They should be falling, he said. There are several reasons stocks have rallied.

1. While earnings this year will fall sharply, expectations for 2021 are a different matter. S&P earnings are expected to rise 20% as people work and spend, factories resume operations, trade recovers and people travel. Investors have been anticipating an earnings recovery since the March low.

2. The Federal Reserve, Treasury and Congress are adding $9 trillion of liquidity to the economy. Before this crisis, annual GDP was $22 trillion, though it’s running at a much slower pace now. The impact of $9 trillion will be enormous. “Don’t fight the Fed,” they say. Investors know that. And there will be more money coming and there are tools the Fed has yet to deploy.

3. If not stocks, what? The alternatives offer little. Money-market funds and CDs pay next to nothing or less than nothing in Japan, France and Germany. Same for Treasurys, even long-term issues. The acronym TINA (There is no alternative) accurately described the bull market a few years ago. It still applies.

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4. Hedge fund buying. Professional investors and hedge funds are measured against the S&P 500. If they beat it, they’ll attract more clients or fund shareholders. If they lag they’ll have a stain on their performance record that will be with them for years. Given the 30% surge in the S&P since March 23, many professionals who were not fully invested then are now in a hole, one from which it is all but impossible to escape unless they take excessive risks. They are buying in fear of missing out on a long bull market.

5. There is rising optimism that a vaccine and treatments for the coronavirus will appear sooner rather than later given the full-court press by the drug and biotech industries.

So there are my five reasons stocks have been rising for almost two months. Stocks are not cheap by any measure, but that doesn’t mean they will fall much. Item number 3 will carry the day. Trillions have been created here and there is more coming. Trillions of euros and hundreds of trillions of yen are being created overseas. Money has to go somewhere.

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.


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