Markets Showing Strength
Last week’s unemployment numbers were awful to say the least. Another 6.6 million people claimed unemployment. This brings the three-week total to almost 17 million people. At the peak of the great recession in 2009 there were 15 million people claiming unemployment.
Many people are struggling to make ends meet so the CARES Act addressed these needs. It granted all unemployed people an additional $600 compensation each week regardless of their current income. Some suspect that this would encourage people to claim unemployment which would inflate the numbers.
One would think the stock markets would have sold off with such unemployment numbers. However, markets have disregarded this. In fact, three out of the four major indexes had double digit gains last week. Why do the markets feel so confident?
Don’t Fight the Federal Reserve (Fed)
Markets can become very irrational when fear is introduced. Shutting down world’s economy would understandably cause a massive amount of fear. To reduce this fear, the Fed basically said that they would do everything to ensure the financial system would not collapse. Investors must have faith that the Fed is able to stop the financial markets from collapsing as the markets continue to go higher. Below are a few ways the Fed is helping.
Federal funds: Reduced the federal funds rate to virtually 0.00 percent. This will reduce amount of interest banks pay each other on overnight loans.
Security purchases: The Fed is purchasing securities on the open market. The fear of security prices going to zero is eliminated as the Fed put a floor on the price. This has helped calm the markets.
Lending to security firms: The Feds offered loans to the largest 24 banks at low interest rates. In exchange for these loans the Fed used equities, investment grade debt and municipal bonds as collateral.
I strongly encourage you not to fight the Fed! History shows us that when they provide liquidity, the stock market will likely recover. Markets can move fast and missing the market upswings can be devastating to your portfolio as it will take longer to recover your losses. Please give me a call if you have any questions or concerns.