Powell's Put and Other Stock Market Observations

Posted in , By David Robinson

How can the stock market be experiencing such a recovery from its March plunge when much of the economic and Covid-19 data is negative? Many of you may be asking this. You wonder if it is irrational market behavior. This is the proverbial “good question.” There are various theories and explanations. FiveThirtyEight

One powerful explanation is sometimes referred to as “Powell’s Put.” Basically, “Powell’s Put” is a shorthand way of observing that Fed policy has become so supportive of economic growth and indirectly the stock and bond markets that it has put a safety net under market risk. Yardeni.com Not everyone views this as necessary or healthy. Washington Post

A second theory is that, as we have become fond of saying, stock investors look forward and are therefore projecting, rightly or wrongly, where they think the US and global economies will be six months, a year or two from now and see a strong recovery. Note that the US stock market historically has been a leading economic indicator of US economic performance.

Two more explanations include the valid observation that some parts of the economy are still doing well or at least noticeably better. Why should not stocks in those industries be performing well? One size does not fit all when it comes to stocks. It is also true that interest rates are so low that investors lack an attractive asset class alternative to stocks, safety of principal aside (as if safety can ever be an aside!).

A Word of Caution! None of the above theories, observations, or explanations provide any kind of a guarantee for an equity investor. Fed policy may change, or the Fed may run out of policy ammunition. Fed Chairpersons come and go. If earnings fail to pick up with reopening, investor optimism about looking out into the future can wane quickly. The economy could recede further dampening the performance of virtually all companies with few exceptions. Lastly, investor risk appetites shift too and could tilt again to safety of principal regardless of yield. Even though current stock market behavior may not be as irrational as it seems on the surface, there is no risk freebie for stock market investors.

  • Covid-19 New Cases Surge in the US: With approximately 4% of the world’s population, the US has experienced around 25% of the deaths attributable to Covid-19. Moreover, the number of new cases continues to increase although the death rate is coming down. It is important to look at the data on a state by state basis. Maine and New Hampshire are among the states where new cases are decreasing. Massachusetts and New York are in the staying roughly at the same rate category. Florida is among the states where new cases are increasing. New York Times
  • Dr. Fauci’s To the Point Advice for Avoiding Covid-19: Per his recent Congressional testimony, “Plan A: Don’t go in a crowd. Plan B: If you do, make sure you wear a mask.” I like that he keeps it simple. He also reiterated his cautious optimism that a vaccine will be ready by the end of this year or early 2021. New York Times
  • Zombie Philanthropy Criticized: Using a donor-advised fund (“DAF”) can be a powerful tax planning strategy for some taxpayers. When a gift is made to a DAF, the donor/taxpayer realizes a tax deduction in the year of the DAF gift. Gifting low-cost basis securities makes the strategy even more effective, as it avoids taxation on the unrealized gain. Then the donor/taxpayer directs the DAF to make the actual gifts to charitable organizations in the subsequent year of their choice. See our blog on this topic for more detail: robinsonsmithwealth.com But there is a legitimate policy concern, in my view, if a long lag occurs between the timing of the tax deduction and the disbursement of the DAF funds to charities. Might the middle ground be to provide the taxpayer with a window of a few years to make the charitable distributions from the DAF? Washington Post
  • Retirement Plan Distributions and Loans in 2020: As we approach mid-year, a reminder that the CARES Act and subsequent IRS regulations have significantly reduced the barriers and penalties for distributions and loans from retirement plans in 2020 only, due to the economic impact of the pandemic. We encourage you to check with your financial advisor and tax professional first, however. Washington Post
  • Maria Konnikova Masters No-Limit Texas Hold’em: Having never played poker, I surprised myself when I became deeply absorbed in Maria Konnikova’s new book, The Biggest Bluff: How I Learned to Pay Attention, Master Myself, and Win. Konnikova, a writer with a Ph.D. in psychology and no serious math skills, set out to master a popular variation of poker with the help of poker legend, Erik Seidel. Her purpose? She wanted to better understand the interplay of chance and skill in life and saw poker as a great metaphor. The story hooked me from the start on several levels, her personal narrative but also the interweaving of skill and chance, which has all sorts of implications for investing and numerous other areas of important human activity. New York Times

Short Takes:

  • J. Maxx Doubles Down on Discount Store Strategy: Wall Street Journal
  • Traveling to See Family and Dining Out Are Post-Pandemic Spending Priorities: CNBC
  • Private Jet Use Surges: CNBC
  • Walking Making a Major Comeback: Outside
  • Michael Lewis’ Podcast Dives Deep into Coaching: Against the Rules

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As always, thank you for reading. Stay safe and be well. We look forward to hearing from you and seeing you in time.

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About the Author David Robinson

A wealth advisor with more than 25 years of experience in the financial field, Dave serves as Robinson Smith Wealth Advisors’ Co-Chief Investment Officer and is a Co-Managing Member of the firm. As a Certified Financial Planner® and non-practicing attorney, he provides clients with deep expertise in areas including investment management and retirement planning.
Disclaimer and Disclosures: Past performance is no guarantee of future results. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Our opinions are subject to change without notice as market and economic conditions shift. Robinson Smith Wealth Advisors, LLC is a Registered Investment Advisor with the U.S. Securities and Exchange Commission (SEC). Registration with the SEC does not imply any certain level of skill or training. Personalized financial planning and individual investment advice are not offered through this website. The general financial and investment information furnished through this website or associated with this website by links is believed to be accurate, however, Robinson Smith Wealth Advisors makes no guarantee to this fact and does not have control over the accuracy of websites found through links within.