The United States roared its way into the New Year with something that seemed to be pulled straight from an action film as mobs stormed Capitol Hill. The headlines sparked panic as they mentioned guns pulled out, shots being fired and people dying; surely this civil unrest would have sent any other market tumbling overnight, but today’s market is not just any market. Instead, a new all-time high was made the following day.
Time-after-time we have seen just how impenetrable this market is by not allowing itself to be derailed since its March lows. Stocks continue to rally with confidence driven by the trillions of dollars in stimulus that will be injected by the coming administration. Not to mention the fear of trade war comes off the table soon as Biden takes the Oval Office; no need to say Biden has a strong relationship with China.
What does Wall Street think of a Blue wave? The President warned us all year of another market crash if the democrats were to win the election. It seems that Wall Street has responded with quite the opposite. Biden has already mentioned a one two punch with a stimulus of over a Trillion Dollars and yet another direct payment for citizens. Investors do not seem to be too worried just yet with Biden’s tax policies since the average tax-reform bill takes 15 months after a new president is sworn in.
Bond Yields are at highs that we have not seen since March which signals an anticipation of heightened inflation which drives the financial sector of the market higher. In other words, borrowing money has never been so inexpensive; this is the main reason why 2020 was the year with the fewest filed bankruptcies even with small businesses struggling. Lending programs and changes to monetary policy made by the Federal Reserve forces interest rates to remain at nearly zero for years to come which provides the market with unlimited liquidity.
The question is how much longer can this market keep plowing its way higher given the irregular conditions. Well it depends on when the Federal Reserve starts tapering off its bond purchasing; the day they stop injecting billions of dollars per month into the market is the day investor confidence will die. Though Jerome Powell has already mentioned in the Fed Minutes that no tapering will be done before 2023, investors seem to be getting cautious as we saw a small but noticeable increase in the DXY (Dollar Index) last week.
Another major liquidity driver this last year was the involvement and surgence of retail trading; lockdowns around the world sparked an interest in young investors that swept the options market. Though it is argued that retail traders have absolutely no effect in moving markets, they still bring liquidity to them. When all returns to normal and money flows back into restaurants, travel, entertainment and other sectors that were shutdown, what will happen when this liquidity fades? Then and only then will we see the true effect that retail has on the market.