When Bill Clinton ran for president, his internal campaign slogan was, “It’s the economy, stupid,” which meant that the economy was the big issue, the one that drove all others. Today I believe that the government is driving the economy, and so as we try to assess the risks to the stock and bond markets—and therefore to investments in our client portfolios—I think, “It’s the government, stupid” is a good internal slogan.
To analyze that statement, let’s begin by taking a look at the markets. They are different and separate—the stock market and the bond market—and the bond market is far, far bigger than the stock market in terms of market value. The bond market, you see, is essentially made up of loans. It’s where debt resides: car loans and credit cards and mortgages and government borrowing. Anytime an institution loans money, it’s basically issuing a bond. The Federal Reserve backs up the bond market, and the Fed’s chairman, Jerome Powell, said that they would spend as much money as it takes to keep it healthy. In other words, the Federal Reserve will not let the banking system/ loan system/ bond market fail. And the Fed has the ability to put as much money into the system as it deems appropriate, so the bond market feels relatively safe right now.
The stock market in general is historically driven by profits. If companies are making a profit or it’s anticipated that they will grow and make a profit someday, then conventional wisdom dictates that people will invest in their stock. That stock would increase in value, and the market on the whole goes up with it and the stocks of other profitable companies. So, who’s been supporting profits during this time? Congress (and we hope it will continue to do so, though at this writing no agreement has been reached). Consumers have been spending the stimulus money Congress gave them. That spending has kept profits relatively stable, which is why I believe the stock market in general has trended upward. I also think that if we get a vaccine and people stop being quarantined, we could see a big spending spree and a catapult of the economy, with the stock market right behind that.
So “It’s the government, stupid:” It’s the government that is keeping the markets bullish right now. Even so, I believe that you should be cautiously optimistic when investing, that you should be invested to the degree that is risk appropriate for you, and that your investing after retirement strategy should include a defensive component, because the situation can change at any moment. If you’d like to learn how to help protect your retirement savings, we’d love to talk to you.