Perhaps the biggest challenge of the day is separating fact from opinion. Indeed, most stock market analysis is just opinion. Sure, the fundamental data is real. Earnings are earnings. Projections are projections. What does the data tell us how does it inform as to where the markets are headed?
In the midst of a highly divisive social climate, much of our news has been colored with editorial. The major media resources require eyeballs to sell to advertisers. That means ratings. And, that means appealing to an audience. You get the idea.
So, discerning what is going on in the investment markets can be tough.
Dollar weakening? Commodities rising? Yields dropping? Do we have inflation on the horizon? Will we see a wave of evictions as renters default on payments? Will the real estate markets collapse as mortgages go unpaid as a knock-on consequence? Heck, are there even any jobs for the middle class to earn enough to pay rent?
What about stimulus? Unemployment? Government programs and government shut-downs? What is essential in our economy? What is essential to Washington DC?
True enough, these are compelling questions. And they do matter. Ultimately, the answers will sway economic outputs and valuations for investors.
Today, it’s still a lot of noise and conjecture.
What do we know?
We know what the market is signaling. Behind all the editorial chaos, major indexes have been climbing higher. On any given day, there are pull-backs. But overall, the trend across most types of assets (except energy recently) have been recovering over the past three months.
The concept is fairly straight-forward. If the markets are a voting mechanism, investors are still voting in its favor. Sure, there are some bigger winners or losers out there. However, the trend has been recovery.
This trend is difficult to find confidence in given the general media narrative and backdrop of a pandemic. But, make no mistake, since the March lows, this market has experienced an exceptional recovery.
The year-to-date figures for the major indexes are uninspiring, but the recovery from the lows is a different story. How one frames the story is important.
So, knowing there has been significant recovery from the lows, what now?
There has been an underlying theme to this market for the past several years. Lots of variables underlie this theme, but in its simplicity, it’s only two things: don’t fight the Fed, and TINA (there is no alternative).
The Fed, really since the Bernake administration, has been highly transparent in its communication efforts. In effect, it has demonstrated it will take extraordinary measures to maintain a stable currency and economy. Since Washington has been largely ineffective for the better part of a decade, the Fed has stepped in with significant monetary policy to bridge the gaps.
The transparency has been useful for the stock markets. It has also contributed to the TINA situation, since the Fed has taken such remarkable steps to keep treasury yields low. Investors have been left with limited options to place risk capital and expect any kind of return. This has kept a bid under the markets for a long time.
Today, we’re seeing interesting shifts in market behavior. For one thing, there are now winners and losers. The pandemic has seen to that, as ‘non-essential’ industries have been hammered (or perhaps eliminated) by government shut-down.
Expect airlines, travel, hospitality, and many small businesses to take years (or perhaps never) to recover from the Covid shutdown. Meanwhile, other companies have thrived. The ‘stay at home’ economy has gone bananas (a technical term). The largest of tech companies have grown into trillion-dollar behemoths.
So why discuss this at all?
Because the mega-companies have become such massive influences on the indexes… and also on politics and culture. They have massive and incredible sway over how everything now operates.
Understanding this can help us understand the future of the markets. Microsoft, Google, Facebook, and the like do not require the consumer to walk into a store at all. So, whether the economy shuts down or not, they survive and they are all massive components in all the major indexes.
Will markets keep going higher? Arguably, yes… despite the concept that we have major structural changes in our economy and many jobs are not only lost but gone.
Understand, bear markets are still possible. In fact, they’re probable. However, it is also possible this market recovers and goes on to all-time highs (like the NASDAQ already has) before investors abandon some of the lofty names that have lifted the indexes in this recovery.
This is more of a mechanical issue than an economic issue. The money that is getting invested is likely going into these areas of the market.
At some point, valuations will be so stratospheric the bubble will burst… even for an Amazon or Tesla… but when is that day? You need go no further than the nearest financial media outlet to get opinions.
What the markets are telling us today — from a technical perspective — is pretty straight-forward. Last week showed a possibility for correction. Instead, the markets had a weak break-out to the up-side. While we are over-bought by some measures, the trading pattern is indicating an upward bias this week, with the possibility the S&P 500 will break above its all-time highs.
A close at new all-time highs will likely lead to further up-side from here.
Don’t get too invested in media headlines at this time. Until there is a material shift in information, the underlying thesis remains: the Fed is standing on the short end of the rate curve, and investors have nowhere else to go. That points to a higher stock market… (until it doesn’t, of course.) 
Have a good week!
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August 10, 2020
