June 8, 2020
The S&P 500® Index rallied above its 200-day moving average in late May, an important psychological and technical milestone, as amassing government stimulus, decelerating new coronavirus case counts, and recovering economic activity boosted investor sentiment. While measures of institutional investor confidence remain muted, fears of missing out on further gains may have also added a self-perpetuating element to the rebound in stocks. Consequently, the S&P 500 is now within striking distance of besting its mid-February high of 3,386, with historically high cash balances providing the means. Nonetheless, risks abound – the economic recovery is unlikely to be linear, corporate bankruptcies are skyrocketing, and the pace of COVID-19 infections remains stubbornly high. The U.S. presidential election will also progressively come into investor focus as the race heats up into November, with Joe Biden’s pledge to raise corporate taxes a risk to prospective corporate profitability and equity market returns.
The strong equity market gains over the last two months mirror the sizable fiscal and monetary stimulus injected into the economy and the associated boost in the money supply. Presaging improved economic activity, the U.S. money stock (M2) has surged in excess of +20 percent year over year for the last five weeks, or over two times the pace during the previous two recessions. The size of the Federal Reserve’s balance sheet has swelled to over $7.1 trillion from $4.2 trillion at the end of 2019, chiefly through the purchases of U.S. Treasuries and mortgage-backed securities – the current consensus is for the Federal Reserve’s assets to exceed $9 trillion by year end. Moreover, only a small portion of the Federal Reserve’s emergency lending facilities has been deployed, suggesting not only that the mere announcement of the measures was enough to stabilize credit markets, but also that the Fed still has plenty of dry powder remaining to support financial markets and economic growth.
Sit Investment Associates will continue to operate at the highest level during this outbreak, and we invite you to contact us with questions or concerns. You can reach us at 612-332-3223 or email us at firstname.lastname@example.org. We will continue to post updates about market and economic developments on our website at www.sitinvest.com.