Monday, November 30, 2020

The Ultimate Object of the Fed's Affection...

Listening to RealVision managing editor Ed Harrison this evening has me thinking about my recent conversations with clients during our portfolio review sessions.

Essentially, I tell a story of how central bank liquidity, covid vaccines and the prospects for fiscal stimulus all speak bullishly about the stock market's prospects going forward. 

But then I pull the rug right out from under that thesis with the fact that I see fundamentals ultimately mattering and, therefore, the real potential for the markets cracking at some point in the not too distant future. 

A point where I fully expect the Fed to come to the rescue in virtually the same manner it did back in the spring. Although, in the spring it ventured into corporate bonds, next time I believe the stock market will become the direct object of the Fed's affection.

Here's Ed, discussing a recent conversation he had with Michael Howell of Crossborder Capital (a London-based research firm) echoing my fundamentals-ultimately-matter sentiment:

"...he (Michael Howell) is saying that irrespective of the fundamentals, when you pump that much liquidity into the markets, when you look at asset prices writ large, that means not just stocks and bonds, but also we're talking about houses and other assets, it causes a bidding up of those assets because money has to be parked somewhere -- and it goes to those assets.

That's not really how I look at the markets myself, I'm still toying with the idea as a potential, but I generally look at markets in terms of the real economy over a longer period of time having an impact on earnings, and, therefore, earnings per share and prices.

So, I believe that markets go up when earnings go up and when multiples expand, but when economies contract and you have a recession you get a double whammy of multiple contraction and earnings contraction. That's when you really have to watch out for outcomes.

That's what we saw in March, and potentially we could see that again in the next couple of months."

So, in essence, Ed and I are on the same page with our this-is-how-the-real-world-works view. 

That said, the reality of the 2020 market has been that after the historic Feb/March selloff, indeed stocks have soared right in the face of what I see as historically ugly fundamentals. 

But, again, I still hold the view that fundamentals matter. Ah, but if/when the Fed steps directly into the stock market I suspect (strongly) that fundamentals will be the last thing on anybody's mind as they throw all caution to the wind and pour into stocks. 

Thing is, it'll virtually have to be a fundamentally-inspired crash that'll have the Fed taking that step…

Stay tuned...

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