What a difference a few months makes.
In the blink of an eye this Spring, the stock market fell a whopping 32.3% in a matter of weeks. The reason, as we all know, was the COVID-19 pandemic.
But what we don’t know is the reason for what happened next: An unprecedented rally that saw the S&P 500 Index surge 39.5% in just 6 weeks.
Now as we learned yesterday, the answer isn’t individual investors piling in and buying stocks with their Robinhood apps. But as the chart below shows, there are 3-Trillion reasons for the recent rally staring all of us in the face: The Federal Reserve.
S&P 500 Chart With Federal Reserve Total Assets Highlighted on Key Dates :
Americans first got a taste of Federal Reserve Quantitative Easing during the depths of the Great Recession over a decade ago.
The process itself is simple:
- The Federal Reserve creates trillions of new dollars and uses them to buy U.S. Treasury bills from the treasury and on the open market.
- The increased Treasury buying leads to increased bond prices and therefore lower yields.
- Investors (including pension funds, hedge funds, and individuals like you and me) in search of yield pivot to the only game left in town that can get them a return: Stocks.
We here at Bottom Line Investing aren’t alone in believing that the rally of the past 10 years has been helped, in part, by a very supportive Fed.
Here’s why: At the start of 2008, the Fed’s balance sheet stood at around $900 billion. But by the end of 2009, it stood at over $2.2 Trillion.
As icing on the cake (for investors), Fed policymakers kept on buying bonds:
U.S. Federal Reserve’s Total Assets (in millions):
As of June 10, 2020, the Federal Reserve’s Total Assets stood at an incredible $7.168 Trillion.
That’s up a whopping $3 Trillion, or 71.4% jump, in just the past 3 months.
The Bottom Line: We’ve never seen money printing like this before. And while there will be a price to pay (eventually), the stock market might just be the place to be with an endlessly-supportive Federal Reserve backing up asset prices.
Thanks for reading and have a great week,
The BLI Team