Uncle Sam’s Bull Market Magic

Published On: December 26, 2019

Written by: Ben Atwater and Matt Malick

As 2019 ends and 2020 kicks off, we are writing a series about markets and the economy.  The series is mainly visual, anchored with charts, but includes brief bullet point explanations of each chart.

Throughout the series, we examine the current bull market.   We explore why we are at record levels in the S&P 500 and how we got here. Our first essay talked about the strong labor market and solid consumer confidence, our second turned to benign inflation and low interest rates, and our third and final essay on “the magic” will focus on the unprecedented late cycle government stimulus which policymakers accelerated in 2019. 

Other essays in this series will examine what’s been interesting and even unique about this bull market and, ultimately, what threatens the bull market in 2020 and beyond.  To read the previous essays in the series please visit our blog.   

• By late 2018, the Fed raised interest rates five times in an attempt to wane the economy from its aggressive financial crisis-era stimulus; however, markets began to sour on the strategy and the S&P 500 fell nearly 20%  from its 2018 peak to its Christmas Eve bottom. 
• The Fed quickly shifted gears in 2019 and has lowered rates three times this year, spurring a banner year for the S&P 500 following a lackluster 2018. 
• The Fed Funds Rate stands at 1.50%, well below its long-term average of 2.58%. 

• Not only has the Federal Reserve aggressively lowered interest rates in 2019, but it has also reignited its quantitative easing program.  Quantitative easing is when the Fed buys bonds (currently Treasury securities) from the open market, thereby injecting cash into the economy and creating new money. 
• The Fed’s balance sheet had been contracting somewhat as the Fed was letting the bonds it owned mature and not reinvesting the funds. 
• However, after recent problems in overnight funding markets, the Fed has once again aggressively begun buying bonds, no doubt increasing investor risk appetites and helping the market’s 2019 “melt-up.”
• The Fed’s balance sheet expansion, which started as an emergency response to the financial crisis, is beginning to look more like an economic addiction, much like low interest rates. 

• Stimulus is coming not only from the Federal Reserve in the form of lower interest rates and quantitative easing (monetary), but also from Congress (fiscal). 
• At this stage of an economic cycle you’d expect to see the deficit narrow as it did for several years post-financial crisis, shrinking to under $500 billion. 
• But lately we’ve seen an explosion in the annual deficit with it heading to almost $800 billion. 
• U.S. stock markets and the broader economy are benefitting from large corporate and personal tax cuts, while the deficit bears the brunt. 

In 2019 the least talked about and most important aspect of the bull market has been unprecedented government stimulus.  In our next note, we will begin to take a closer look at what’s been particularly interesting and maybe even unique about the bull market.  As always, thanks for your support and your referrals.  We truly appreciate working with you.