Bamboozled

That slippery ol' stock market

Ravenous value investors have been foaming at the mouth for months, anticipating the “impending” stock market crash. With the famous adage “buy fear, sell greed” echoing in their opportunity-starved ears, they prowl the barren wasteland of the New York Stock Exchange, hollow gazes searching for a good investment.

Alas! They find nothing, and are left to wonder how such a promising economic upheaval avoided coming to pass.

Seriously though, where the heck did that inevitable stock market crash go?

Last I heard, US GDP contracted by 30%, there were still 20 million some Americans unemployed, and bankruptcies were on the rise.

In fact, the Bureau of Labor Statistics reports an unemployment rate of 8.4% as of August, with roughly 14 million civilians still unemployed.

Turns out, there’s a few reasons the stock market hasn’t tanked, and the way things are going, it may not.

1. The Federal Reserve

As I discussed at length in my last newsletter, the Federal Reserve has enormous influence over the amount of credit in the economy. In times of financial crisis, they’re able to lower interest rates and print money, both of which stimulate spending throughout the economy.

Back in mid-March, the sky was falling and the stock market had multiple days of hemorrhaging, losing over 35% of its value. However, come March 23rd, Mr. Market picked himself up, dusted himself off, acted like nothing happened, and began a meteoric tear through the market stratos that has largely been unchecked.

So What Happened on March 23rd?

On March 23rd, the Fed announced their commitment to use their “full range of tools to support households, businesses, and the U.S. economy overall in this challenging time.” This includes buying government securities, aka the government’s debt, in order to facilitate “smooth market functioning.”

Buying the government’s debt is actually a convoluted tool that the Fed uses to influence interest rates and print money. (It’s a tad complicated - expect a future newsletter laying out how all that works.)

Smooth market functioning has indeed been achieved. Since March 23rd, the Dow Jones Index has risen over 50%, nearly regaining its pre-Pandemic value.

Besides the government’s debt, the Fed also stated it would step in to purchase corporate bonds.

Bonds are essentially productized debt. If a corporation has debt, they can sell it in the form of bonds, which ensures the company gets money for operations and debt repayment, while the purchaser collects interest.

In short, the Fed’s backing of corporations ensured that they couldn’t fail. If businesses don’t fail, people don’t panic, fear doesn’t get injected into the market, and everything’s hunky-dory.

2. America Reopened

Despite the fact that cases of the Coronavirus were increasing, many states began to reopen businesses. Daily life resumed, the demand for goods and services increased, businesses filled those demands, and therefore business profits returned.

In short, many businesses didn’t do too bad. Through a combination of returning profits and stimulus packages from the government, businesses were able to ride the waves of the pandemic, leaving no real reason for the stock market to combust.

Speaking of businesses that didn’t do poorly brings us to point three.

3. Big Businesses Profited

The S&P 500 is a market index comprised of the 500 largest companies traded through the New York Stock Exchange. Of these 500, the top 10 companies account for over 25% of the market cap, or “weight” of the entire index.

These companies will sound familiar: Microsoft, Apple, Amazon, Google, Facebook, Johnson & Johnson, Visa, and Proctor & Gamble.

Curious to dig deeper, I compared the revenue of each business in the last business quarter to its corresponding quarter in 2019. The results are revealing:

Profits for Microsoft, Apple, Amazon, Facebook, and P&G actually rose during the Pandemic. Despite the shuttering of the American economy and lifestyle, a significant portion of the largest American businesses improved.

Improved drastically, in the case of Amazon.

In the worst case scenario, with roughly 75% of companies in the S&P 500 failing, the top 25% was able to stabilize and support the broader market.

Of note, the numbers I’ve used here are from Q2, which ended July 1st. Q3 ends September 30th, today, and will provide much more insight into the financial health of these companies and the broader US economy.

Now that the normal tempo of life has been largely restored, I expect to see business profits increasing, as well as a positive resurrection of GDP.

Events with the potential to shake the market still loom on the horizon, like the impending election and the resolution of the pandemic, but for the time being I believe positive strides in business profits and overall economic health will keep the market ship afloat.

I also think the Fed’s actions in the imminent months will be telling. If stimulus to individuals and businesses is fully stopped, how will the market react? Debt burdens may not yet be fully realized, which would require the Fed to print more money and risk inflation across the economy.

These are certainly some uncertain times we live in, but I appreciate the steadfast support of you all!

Tune in next week to watch me stumble through broad market indicators like a blind bat.

(If you know, you know)

Thanks for reading :)