The financial world is a changing place. Last year, the S&P 500 index gained over 12% and the Euro Stoxx 50 gained over 21%. What does this mean for your investment portfolio? How are the traditional safe havens, Gold and Bonds performing? Is +4.5 a good time to buy or sell stocks? Let’s take a quick look at what has changed and how it impacts your betting decisions.
What Influences the Stock Market?
Many factors go into establishing a stock market’s direction. The biggest influencers are world trade (exports vs. imports), economic growth (the size of the economic pie), earnings (what companies are making and how much), and business confidence (people feel good about the economy and their personal finances).
How Has the Fed and the ECB Fuelled the Market?
The Federal Reserve and the European Central Bank have engaged in coordinated quantitative easing, printing money and buying government bonds to boost the economy and stock market. In January 2019, the ECB purchased a 10-year bond for €500 million, while the Fed bought a 3-month bill for $23 billion in June 2018.
Will the Incoming Trump Budget Cut Spare Traditional Safe Havens?
During the Obama administration, the yield on the 10-year Treasury note fell from 2.85% to 1.61% as the Fed cut interest rates and engaged in quantitative easing. In January 2019, the 10-year note yield fell below 1% for the first time since 2009 as investors flock to the safety of government bonds. For Gold and Bonds to achieve such massive gains in the past year, they have to be considered as relatively safe havens.
Is This Year’s Bullish or Bearish Market?
It’s always difficult to tell whether a market is in a bullish phase or a bearish phase, so let’s take a quick look at the major indices to try to establish a broad perspective. The S&P 500 index is currently trading at 2,928. The NASDAQ composite now trades at 8,545, up 15% from its February 2019 low. While both the S&P and NASDAQ are up significantly from their February 2019 lows, they are not yet in a bullish phase.
The Dow Jones index (^DJI) also remains in a holding pattern, indicating it’s in neither a bullish nor a bearish phase, but rather, the market has not found its true level yet. The ^DJI is currently at 25,400, up 17% from its February 2019 low, but still well below its February 2020 peak of 27,700. The FTSE 100 (^FTSE) is also in a holding pattern, having recently turned lower, although it is still well above its February 2019 low.
Will Rising Treasury Yields Spur More M&A?
Financial market participants have plenty to fear in the wake of the global pandemic. One area that will surely experience acceleration is mergers and acquisitions (M&A). Rising Treasury yields will encourage companies to acquire others to grow and expand their businesses. With borrowings at a decade-low and interest rates close to zero, companies have an incentive to make acquisitions.
Should Active Investors Follow the Crowd?
In normal times, the active investor follows the fundamental advice of the market, which is to buy low and sell high. During crisis times, however, this fundamental piece of investment advice can be overridden, which is why many market experts feel this is the right time for active investors to take a short break from the market and let the experts manage their portfolios. If you are an active investor looking to leverage the market’s current performance and want to short the S&P 500 index, you can use one of the major brokerages’ platforms, like TD Ameritrade’s 2-Minute Rule to execute a short sale of 1,000 shares of SPX at $2,928 per share. If you are a more experienced investor or a professional investor looking to leverage the market’s current performance and want to buy the S&P 500 index, you can use a well-known fund that follows a top down approach, like Fidelity International’s Emerging Markets ETF (FMEG) to get access to the market’s largest companies that are showing solid performance and have passive maintaining programs. With the S&P 500 index priced just 1% below its 2020 peak, it’s a perfect time to purchase a broad selection of blue chip stocks. Both the FMEG and SPX offer you a safe and sustainable investment strategy during these challenging times.