The Stock Market Tug of War

Posted in , By David M. Smith

After a big run up the previous months, last week the U.S. stock markets dropped almost six percent in one day.  Driving stocks down were a reaction to virus cases accelerating in many states and the realization it will take a long time for the economy to fully recover.  NYT  Then on Monday this week, the Federal Reserve announced it will start buying individual corporate bonds and created more credit facilities to expand bank lending to small and medium businesses.  Bloomberg  Stocks responded accordingly this week and have been up strongly.  So, stocks are locked in a great tug of war.  On one side is the Federal Reserve and Congress on the other is news about rising virus cases and the economic outlook.  It is also a tug of war between hope and faith in government support versus the reality of a tough economic environment and a stubborn contagious virus. 

It is apparent that the Federal Reserve and Congress, are going to use every tool or policy they have to support the economy and markets.  The Fed can react very quickly to markets and events, Congress takes more time.  But, so far, for stock investors, it’s the hope and faith in government support that has been winning the tug of war.

  • Steroid Drug Offers Hope in Reducing Virus Deaths:  As health care researches learn more about the COVID-19 virus, one area of focus has been the body's extensive inflammatory response.  Many current drugs used to reduce inflammation are being explored to see if they can help.  Though the results are preliminary with a small human trial, one common and cheap steroid called dexamethasone is showing promising results in reducing deaths.  I don't want to be overly optimistic since the results are preliminary, but some scientists are calling this a "major breakthrough."  Reuters

  • Will the Fed Cap Bond Yields?  The Fed is exploring the possibility that they would cap bond yields.  The caps would mean the Fed would buy Treasury bonds to maintain a specific yield maximum.   By capping yields, the Fed would ensure that higher yields would not undermine economic growth.  If implemented, it would have many ripple effects from how investors would view bonds, how investors measure riskier investments versus bonds, or even what happens to mortgages rates which are usually tied to Treasury yields.  This is a story we will be sure to watch.  WSJ
  • The Seacoast Rep Gets National Acclaim:  Many businesses and non-profits have had to make stark choices the last few months and close down.  But many are pivoting and finding creative ways to "keep their doors open."  The Seacoast Rep in Portsmouth is receiving national recognition as one of the few theaters staying open by offering online live theater and programming and even creating a radio station!  So, go online and check out a show!  NYT  Seacoast Rep

 

Quick Hit Articles for the Week:

  • Due to the success of remote work, workers are leaving the big cities: WSJ
  • Can you track the start of the virus in China by counting cars in hospital parking lots? CNN
  • Stock market volatility is becoming its own asset class: WSJ
  • Everything you wanted to know about how effective it is to wear masks: Erin Bromage
  • Due to the economic crisis, millions of ounces of gold have arrived in New York: WSJ
  • Stocks are a great inflation hedge long-term, but not in the short run: The Economist
  • The world is eating less sugar due to sheltering in place: Bloomberg

 

  • Maine is the Safest State:  In a survey using data such as coronavirus support, crime, and workplace accidents to gauge overall safety, Maine came in first.  The rest of the New England states did well too.  I never want to take these rankings too seriously as it depends on the methodology and data used, but it always seems like the New England states are near the top in these surveys.  Wallethub
  • An Example of Survivorship Bias Using World War II Navy Planes:  As investment managers, we are aware of survivorship bias.  For example, an investment category can display better long-term average performance if the strategies that closed due to poor performance over time are not accounted for.  This is especially important in categories where many strategies close, such as hedge funds.  But survivorship bias has implications in many fields.  This article describes how survivorship bias was used counter-intuitively to help protect Allied planes during WWII.  Twitter
  • Is 10,000 Steps the Magic Number?  I have a Fitbit and my daily steps goal is 10,000 which was the default number when I purchased it.  If I'm being honest (and really, why wouldn't I, because how many read this far into the newsletter?), I only consistently reach that number on weekends.  A desk job has serious setbacks for walking.  Anyway, the more you walk the better it is for you.  But it doesn't have to be 10,000 steps.  Read on.  WSJ

Thank you for reading The Friday Buzz.  Please give feedback regarding the newsletter and forward it to anyone who may enjoy the articles.  Enjoy the beautiful summer weather and have a nice weekend!  Be well and stay safe!

david-m-smith

About the Author David M. Smith

David is a Senior Financial Advisor and the firm’s Co-Chief Investment Officer. He has more than 20 years’ experience in the financial services industry and holds the highly respected Certified Investment Management Analyst™ and Certified Financial Planner™ designations; he is a Co-Managing Member of the firm.
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