Why the Stock Market Keeps Going Up

 


With the S&P 500 reaching all-time highs every week, it seems like the euphoria for a big 2020 year in the market is well intact. The S&P 500 had its best August since 1986. A lot of Tech investors within the equities market are getting richer and richer every day to a point where it starts to create headaches on what to do with the enormous gains. Some folks have started converting the "funny money" to real, hard assets. I wrote in April of 2020 why the Corona-Virus provides a great buying opportunity in the market. Those who bought the S&P 500 ETF (IVV ticker symbol) in April will be up ~30% in August 2020.

Personally, the performance of my stock portfolio is on track to surpass last year's performance, thanks primarily to big gains from large moats such as the FAAMG (specifically Apple), the well-beloved Tesla, and the levered TQQQ. Since my overall stock portfolio is ~70-75% weighted towards the Technology sector, it has benefitted greatly from the "work from home" mantra and the increased digitization of the economy. The market capitalization of U.S. tech stocks is now greater than the value of the entire European stock market, according to Bank of America. 

The wealth created within the stock market during the pandemic seems like a rocket ship heavily decoupled from the earth given the amount of unemployment during the same period. With that let us delve deeper into why the stock market has been a wealth-building machine in the past few months especially for those who bought public equities during the V-shaped dip in March 2020 - May 2020. 


Why the Stock Market has been going up

1. Federal Reserve

I wrote how the federal reserve was one of the few to dream big in 2020. The federal reserve has shown this year that they will do whatever it takes to keep the economy going. Interest rates were slashed and the cost of borrowing got incredibly cheaper in 2020 due to the actions of the federal reserve. I was able to acquire two real estate assets at 2.625% and 2.75% interest rate this year which is much improved from the first real estate asset I acquired 4 years ago at a 4.5% interest rate on a 30-year. With a lower financing cost, the returns for hard assets have improved significantly and with the federal reserve recently announcing that they have shifted objectives to increasing inflation over the next few years, you can only imagine that real estate prices can only go up given it is used as a hedge against inflation. The same is expected in the equities market and only bonds will suffer from increased inflation. Inflation measures how quickly (or not) the price of goods and services grows, while the interest rate a lender uses to charge a borrower is often based on the Federal Reserve’s federal funds rate. The term "bonds are trash" might become the new norm given the market environment we will be in over the next couple of years. My current allocation has nothing allocated towards bonds, although, I am a fan of municipal bonds due to its tax advantages

2. Technological Adaptation due to the "Work From Home" Phenomenon

Due to the pandemic, most companies have deferred coming back to the office till 2021 and some have fully eliminated it and embraced working from home forever. Office commercial real estate has been impacted due to the changes, although, those with long term lease, credit-rated tenants with low leverage should be minimally affected in the near-term. With some companies having work from home mandates for the rest of the year and even into 2021, some sectors of the commercial real estate markets have over-performed due to the increased need for those asset classes while some have underperformed due to the decreased demand. Based on the impact of the CoronaVirus, most companies are starting to reconsider the extent of the office space they really need. Some jobs are becoming remote helping lower expenses and improving cash flows for these companies. I anticipate this trend to continue to a smaller extent once the pandemic is over. On the other hand, due to the increasing demand for e-commerce and online shopping, industrial properties should enjoy decades of growth.

Companies within cloud computing, video conferencing, and online retail space have seen a surge in the demand for their products. The economy is starting to realize how interconnected we all are due to technology and the full power of adapting to the new technologies available for us to use. This change has fueled the performance of the entire Tech sector. With Apple coming out with its 5G iPhone, I anticipate robust sales as most consumers upgrade their phones to fully integrate into the work from home environment.

3. Social Impact on Change

Outside of the pandemic, there has been a huge shift by hedge fund managers, private equity funds, and the public perception of Environmental, Social, and Corporate Governance (ESG). Tesla has been a big story this year surging in share price to points that it makes it difficult to explain its valuation. With its stock split making it more affordable from a perception standpoint, I anticipate more Millenials purchasing shares of the company going forward. The reduced price per share after companies split a stock attracts many smaller investors. Within the ESG space, there also has been an increased demand to see more Black executives running publicly traded companies. I anticipate an increased discussion on such issues as most are starting to become aware of the societal issues the world faces and what can be done to combat them.

In a letter written by BlackRock, the world's largest asset manager, with $7.4 trillion in assets under management as of end-Q4 2019, Larry Fink wrote about ESG being incorporated into their investing strategy. He said, “The purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being – what it does every day to create value for its stakeholders. The purpose is not the sole pursuit of profits but the animating force for achieving them.” 

4. Hopes of a Vaccine

Shares of Moderna, an American biotechnology company focused on drug discovery, drug development, and vaccine technologies based exclusively on messenger RNA, have surged this year due to the progress they have made in finding a vaccine. Pfizer and Johnson and Johnson (JNJ) are also in the race to find a COVID-19 vaccine.

The stock market is a forward-looking machine. Stocks typically trade with the future in sight taking into account future cash flows and discounting it to its net present value. With that in mind, if we anticipate that we will have a vaccine that is fully deployed within the next 12 months then it makes sense that analysts will price this into their valuations helping boost the prices for those stocks.





Financial Savant was born in 2018 and has received a really good reception so far. This blog serves as a resource to help spur open discussions on generating income, saving, investing, and overall wealth management.

Every article written on Financial Savant is based on first-hand experience and pertain to ongoing current events within the financial and economic-sphere.


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Financial Savant recommends investing in real estate through a hands-off approach using Fundrise and managing your finances using Personal Capital.

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