As Americans gather to give thanks this week, those fortunate enough to have wealth to invest in the stock market should be especially grateful.
Despite recession worries, trade tiffs, and rancorous politics, investors could hardly help but show hefty gains. Through Thursday, the SPDR S&P 500 exchange-traded fund (SPY) had returned 25.88% since the beginning of the year, Morningstar calculates. With big tech stocks leading the way, the Invesco QQQ Trust (QQQ), which tracks the 100 biggest Nasdaq stocks, showed an even larger 31.54% return.
The SPDR Dow Jones Industrial Average ETF (DIA) trailed a bit with a 21.41% return. Investors in U.S. equities were up $6.2 trillion in 2019, according to Wilshire Associates’ calculations. And diversification, always a prudent course, didn’t detract much in terms of performance. A portfolio of 60% SPY and 40% iShares Core U.S. Aggregate Bond ETF (AGG) would have returned 18.91% through Thursday.
The market has been underpinned for weeks by the supposedly imminent prospect of a phase-one trade pact with China, although it seems no closer, despite assurances that it’s on track. Congressional approval of the Hong Kong pro-democracy bill could result in another snag, although President Donald Trump on Friday suggested that he might veto it to seal the trade deal.
Occam’s razor holds that the simplest explanation is often the correct one. The clearest reason for stocks rising to records and fears of recession fading appears to be money, pure and simple. It has been decades since most analysts paid attention to the money supply, but Jason DeSana Trennert, who runs Strategas Securities, notes that the M2 money measure—cash, checking, savings deposits, small certificates of deposit, and money-market funds—has been growing at a rapid 10.4% annual clip over the past three months.
Supporting that growth has been the rapid expansion of the Federal Reserve’s balance sheet, which has climbed at a 31% yearly rate over that span. While the Fed says its monthly buying of $60 billion of Treasury bills doesn’t represent quantitative easing—the central bank’s past rounds of securities purchases to stimulate the economy—Trennert calls it a “distinction without difference for owners of risk assets,” such as stocks. The expansion has been international, adds Evercore ISI, which points out that the balance sheets of the European Central Bank and the Bank of Japan also are headed higher.
At the same time, nominal gross domestic product is growing at a 3.5% pace. That means the money supply is rising faster than the economy, leaving lots of excess liquidity for financial markets. “This makes it extremely difficult to short risk assets,” he writes. A lot of that monetary growth represents money-market funds, which total $3.6 trillion, up 22% from a year ago and close to the peak of $3.9 trillion, hit in March 2009 at the bottom of the bear market. “Current cash levels are yet another indication that we are far from the euphoric stage that usually signals a major bull market top,” Trennert concludes.
The monetary expansion isn’t likely to show up in the current quarter’s numbers, however. The Atlanta Fed’s GDPNow estimates fourth-quarter real GDP growth of just 0.4%, while the New York Fed’s Nowcast estimates 0.75%. But other data point to better growth ahead.
IHS Markit’s (INFO) flash purchasing managers’ index rose by one point, to 51.9, in November. That put it at a four-month high and above the 50 mark denoting expansion. The reading was better than that of the less comprehensive, but more widely followed, measure from the Institute for Supply Management. Home-building also is responding to the monetary stimulus, with housing starts up in October, despite weakness in the Northeast, and building permits surging to their highest level since August 2007, just before the financial crisis.
With the rise in stocks and home values, Evercore ISI estimates, Americans’ net worth is on track for a 10.4% gain from the level a year ago. That alone should inspire gratitude, even in these contentious times.
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