With unemployment at the highest rates since the great depression, and interest rates going to nearly zero, why are markets at nearly an all time high? Many consumer, and even some institutional investors are wondering the same question. We will take a look at several factors, and try to gain an understanding of what is causing the recent rally.
It’s Priced In
Many consumer investors have been hearing the line, “it’s priced in.”. Sure, the market has a habit of being two steps ahead of everyone historically. Algorithms scan things such as earnings reports, near terms futures, buzzwords in breaking news etc. There is no doubt that these same algorithms at least partially triggered the massive sell off in February.
The sell off was largely expected, but what was not expected was the massive rally that the markets faced in the weeks after. SPY, an ETF that closely tracks the S&P 500 has been nearing all time highs for the past two weeks. What is causing investors to think that the economy is anywhere near an all time high?
We are facing very uncertain times in the national and global economies. Oftentimes, investors can take a look at the price of gold in times of market uncertainty. Gold has been steadily rising over the past couple of months, which seems to show that many investors are unsure of the direction our economy is heading in.
The Big Boys
Several members of our staff work as commercial loan brokers in addition to their work here at Impression. They have seen first hand the hesitance in the financial sector among many “big players” in both commercial and private equity. LTVs requirements have faced an uptick, and some lenders have decided to take time off, to evaluate the market. This hesitance in the commercial lending sector has given us great pause when looking at the market. Is now the time to buy in?
Hedgefund managers, and many of the most influential institutional investors have been speaking out in regards to the health of the economy recently. Warren Buffet openly spoke out against many stocks related to the travel industry. American Airlines took a notable hit after the Mogul of Omaha spoke out against the travel industry. Many investors also seem to be annoyed by some of the airlines handling of the COVID crisis. Photos have circulated on social media of fully booked flights.
Many investors seem to think that the economy is being propped up by the Fed. Jerome Powell has expressed that he has no concerns that government will run out of money. With recent stimulus packages, many individuals are worried that the value of the dollar will face rapid decline as inflation sets it.
Many people being unemployed will also have an effect on the economy. With unemployment numbers in the millions, many households are being propped up by federal supplemental unemployment, which is poised to run out in July, unless extended. In the long term, consumer confidence will likely slip as unemployment benefits run out.
With the recent rise in unemployment rates, it seems that the health of the economy is being propped up on false confidence at best. While the markets appear to be showing tremendous growth, and thriving stocks, we are bearish.