We have alluded to the incredible bounce off of the market bottom since March 23. There have been ‘warning’ articles in the financial media suggesting that this looks somewhat (perhaps a lot) like the bounce in 2009 and it must come to an end soon, but the Nasdaq 100 Index continues to power ahead.

It seems irrational, but let me also remind you that markets can stay irrational longer than anyone can stay solvent betting against the trend. Let’s take a look at the last time a new bull market started – in the spring of 2009 — that’s shown in the higher chart below of the SP 500 Index beginning in March of 2009.

(Chart source: Esignal)

Perhaps some of you can remember that’s the time when the market blasted off after the financial crisis of 2008. Underneath it is another chart of the SP 500, but we have lined up the two charts so that the March bottom of this year lines up with the March bottom in the 2009 chart.

As you can see, in the prior recession bottoming the chart continued on its growth projectile for much longer than the current bull market has been with us. This argues (but certainly does not promise) for even higher prices in the ‘Super Tech’ Five stocks powering the rally, and of course the overall market as well.

Now, keep in mind that eventually, every single market analog breaks down. I remember when the investment writers were using the Japanese market in the 1990s against the NASDAQ in the 2000s. It was trading lockstep – until it wasn’t and it never regained that rhyme again. Also, the sentiment in 2009 was much, much worse at this stage in the bull market than today. Summer 2020 has seen the fastest cycle from fear, despair and despondency to celebratory, giddy and greed in history.  However, the fact that it has gone mostly straight up, does not necessarily mean that the ride is over.

Ron’s Market Minute — A Relevant Fed Meeting

Regular readers know that I often suggest, especially over the recent few years, that a FED meeting is mostly a big yawn – something that could be ignored by most readers. This week’s ‘virtual’ meeting of the FED conference, however, might be different in its effects. 

Fed Chair Powell gave a detailed and MUCH more relaxed policy on inflation. He said that the bankers have agreed on a major new policy of ‘average inflation’ which will allow inflation to run hotter (specifically to run above its 2% inflation goal) after periods of lower than the 2% inflation target.

This is the result after a year-long process during which the central bankers travelled the USA talking policy to, not just business leaders, but also to the general public. Their end-product consensus is that the prior inflation target was too rigid and that an ‘inflation overshoot’ should not be a trigger that would induce a market reaction. Instead, a softer approach is in order: 2% is still the target range but momentary exceedings will be tolerated. 

So why is this important? Financial textbooks typically place blame for prior recessions on the Fed with the explanation that as the economy boomed and inflation spiked, the Fed give us higher (or much higher) interest rates to cool off inflation. However, it is claimed that putting too tight a lid on rates caused the economy to come crashing down resulting in recessions. 

It goes without saying that the Fed wants to keep the funds rate close to zero for at least another two years, with more Fed lending to businesses, states and cities that may compensate for the disappointing gridlock this summer on fiscal stimulus. 

With the Fed’s announcement of its desire for higher inflation, the astonishing stock rally could have more legs. Whether this Fed stance leads to a bubble in stocks and housing apparently doesn’t worry the central bankers. Be careful what you wish for, we say.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
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Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
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www.denkinvest.com

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Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.

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