Why is the US Stock Market Roaring in June 2020?

My stock portfolio is up 53% YTD. It’s not because I’m genius at stock picking. Statistically, I’m no better than a monkey throwing darts at a stock list in a newspaper.

It’s certainly not because businesses are booming. In fact, we are in a recession — almost 1/3 of the US workforce has already filed for first-time unemployment claims last week as businesses are still not operating at full capacity because of COVID19. That’s even worse than the great depression numbers! I think we will see even more job losses after Q2 earnings.

So why on earth is the stock market roaring despite a health pandemic, huge unemployment, and a recession? Why is there such a big dislocation between the stock market and economic data?

First, the stock market is not an indicator of the health of an economy. The stock market is just a reflection of the central bank’s actions.

Back in March, we were in a liquidity crisis. Basically, everyone panicked and sold any assets they could to get cash as quickly as possible. As a result, we saw stocks drop by 30%, Bitcoin by 50%, Gold by 15%, etc.

Low behold the Fed steps in to save everyone because they have a god complex when it comes to markets. They only have 2 tools at their disposal — cut interest rates and/or print money to buy assets (Quantitative Easing)

The federal reserve has printed almost $8 trillion in 3 months! That’s almost a 100% increase in the balance sheet in just a couple of months.

Once your print money you have to inject it back into the economy through asset purchases, corporate bailouts, and stimulus checks, therefore, increasing liquidity in the market.

Isn’t that good? The government is trying to save us? Well, not quite. You see this led to the following things:

1. People are using their stimulus checks to purchase stocks.

People earning between $35,000 and $75,000 annually traded stocks about 90% more than the week prior to receiving their stimulus check.

The infamous stock trading app Robinhood saw record volume in transactions that led to major outages. Not to mention it recently helped them raise $280M at a valuation north of $8B.

2. People are speculating that the economy is about to open and hoping stocks will roar which makes them purchase stocks, driving stock prices sky-high.

An economy is a highly complex organism. It has so many moving parts and externalities. So many things are absurd and seem illogical. One prime example: Hertz, a car rental company, filed for bankruptcy on May 22. Over the next 2 weeks, it’s stock price increased by almost 10X.

3. Increase in asset prices

Increased liquidity is causing inflation as the growth of money is outpacing the growth of the economy. Inflation is a topic that can be debated depending on what indicator you’re looking at.

However, it’s obvious that the asset prices are going up as the Fed has been aggressively buying assets across asset classes at an alarming rate regardless of the quality of those assets. In the short term, in select markets, people with assets will make money. The long term consequence of the economy is unknown at the moment.

4. Increase in income inequality

The lower income brackets don’t have any non-cash assets. Most of them either live paycheck to paycheck or have meager savings in low interest-bearing accounts. They also don’t have inflation-adjusted contracts. This gradually erodes their purchasing power without realizing it soon enough.

Nobody knows exactly what’s happening with the economy and nobody can precisely predict it. The stock market is probably up because the Fed is flooding the market with a ton of money and that money is going into the stock market as it historically has been a great speculation tool for people to make quick money.

So hold off on bragging how your stock portfolio is beating the index by X%.

This article was originally published here