Analysts and investors are racking their brains, trying to figure out how the Nasdaq 100 (QQQ - Free Report) is trading at all-time highs, and why the S&P 500 is only down a few percent for the year with unemployment figures reaching depression levels. There is no doubt that the unprecedented level of fiscal and monetary stimulus has backstopped the equity markets and began this extraordinary rally, but what continues to drive it?
There are numerous reasons, all adding their part to the markets over 40% surge since March 23rd.
The most significant catalyst for the continued stock market rally is the reopening of US state economies, which has been seemingly successful thus far, adding optimism that a swift economic recovery is underway.
Still, any sign of another pandemic wave could have devastating effects on your stock portfolio.
COVID has provided tech companies like Amazon (AMZN - Free Report) , Zoom (ZM - Free Report) , Microsoft (MSFT - Free Report) , and a cornucopia of other tech stocks, driving the Nasdaq 100 back to all-time highs. As these tech names begin running out of steam, the market rally is turning to more cyclical value stocks for a continued upward push.
Names like Delta (DAL - Free Report) , Macy's (M - Free Report) , and Marriot (MAR - Free Report) , have been devastated by the global pandemic. These stocks are just recently experienced a price surge as FOMO investors rush into the seemingly 'undervalued' shares, just hoping they won't miss out on the continued rally.
New Investors Flooding The Market
With the world at home and online trading being more accessible and affordable than ever, there has been a flood of new brokerage accounts. Current accounts are seeing substantially increased activity. Online brokerages like E-Trade (ETFC - Free Report) , Interactive Brokers (IBKR - Free Report) , Schwab (SCHW - Free Report) , TD Ameritrade (AMTD - Free Report) , and Robinhood all reported an increase in new accounts and activity as new investors rush into these volatile markets just hoping to get in on the action.
This influx of new investors and increased activity amid ostensibly 'one of the greatest buying opportunities of our lifetimes', continues to flood new money into equities and likely pushing some stocks past their intrinsic value.
Inflation is beginning to take center stage of concern as Jerome Powell, and his dovish brigade of Fed governors drown the US economy with cash. Fiscal stimulus is keeping money in American's pockets, but with more than 40 million unemployed in the past 10 weeks, economic productivity is way down. All this new money circulating in a 'less' productive economy is a recipe for inflation, especially when combined with some of the lowest interest rates in US history.
Some are theorizing that expected inflation in the coming year may be one of the many catalyzers adding to the broader markets' tremendous rally since March 23rd's lows.
Monetary and fiscal stimulus will likely continue to flood our economy with cash, but at what cost? The answer is probably a combination of above-average inflation and an increase in taxes.
The stock market is in uncharted waters, and I would tread lightly. Be cautious with your stock purchases at this seemingly stretched level. We are experiencing the largest unemployment figures since the great depression, and social unrest is inciting chaos across US cities. I am personally hedging my portfolio with SPY (SPY - Free Report) put options and waiting for a pullback before I start buying up equities again.
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