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
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
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
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
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
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.
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