Just Put It In Stocks

“Just put it in the stock market. You’ll always make something.”

I heard that from someone over the weekend. Scout’s honor.

And it’s true, depending on your definition of “make.”

If you’re sitting on a spare, say, $100,000 that’s currently dying of boredom in a money market fund, you can move it into a handful of blue chips and generate a little bit of income. The figure (below) just shows there’s still some $4.3 trillion idling on the proverbial “sidelines” — the ubiquitous “dry powder.”

But I don’t think that’s what the person I spoke to Saturday meant by “make.” Rather, I think she meant “make” to mean that on December 31 of any given year, a portfolio of stocks is guaranteed to have a market value that’s higher than it was 12 months previous.

While I can’t say whether she believed that in a literal sense, her tone suggested she viewed the prospect of a bad year for equities as something that belonged mostly to the realm of the theoretical. I should emphasize that she’s a highly intelligent individual, with a post-graduate degree. We didn’t discuss the matter further, as stocks weren’t germane to our call, but it occurred to me that her ad hoc assessment likely reflects the general public’s perception of the stock market.

I know she made money last year. So did her husband, whose portfolio was (and, I suppose, still is) skewed heavily towards big-cap tech.

It would probably seem strange to them, just as it would to most Americans, to learn that last year’s gains were engineered. Although you could quite plausibly argue that stay-at-home stocks and mega-cap tech shares would have performed well during COVID irrespective of monetary policy, equities (broadly construed) could have suffered steep additional losses, perhaps of the catastrophic variety, were it not for the Fed’s backstop of corporate credit.

Put differently, 2020 may have turned out ok for the likes of Amazon, Apple, Google, and Facebook regardless of the Fed (and because they’re so heavily weighted at the benchmark level, their gains would have helped cushion the blow), but had Jerome Powell focused his energy narrowly (and exclusively) on facilities aimed at ensuring dollar funding markets didn’t freeze and/or that the “plumbing” remained operational, it’s entirely possible that the stock portfolios of everyday people would have been decimated. On March 23, 2020, the Fed effectively declared the selloff over, by decree. That isn’t well understood by most Americans.

The Fed obviously wasn’t the first central bank to backstop corporate bonds in its jurisdiction, but starting in late March of 2020, investments in corporate America effectively came with a US government guarantee. That’s a bigger deal psychologically than the Bank of Japan buying ETFs or the ECB distorting the euro fixed income market beyond recognition. It represented the issuer of the world’s reserve currency telling the market that the pandemic would not be permitted to cause credit events for corporate borrowers that were investment grade prior to the onset of the public health crisis. Unless the world were to suddenly lose faith in the dollar, that guarantee was unassailable. You cannot challenge a guarantee made by the entity with the power to conjure the world’s reserve currency at will. If you’d be inclined to say the Fed didn’t actually end up buying all that much in terms of corporate credit, I’d say that underscores just how powerful that guarantee actually was.

The figure (above) is familiar to regular readers. It’s just weekly Lipper flows for corporate bond funds. Note that investment grade flows have been positive every, single week except for one since the Fed rolled out its guarantee for corporate America.

Bloomberg described the same “can’t lose” mentality on Saturday in a piece aptly entitled “Bubble Warnings Go Unheeded as Everyone Is a Buyer in Stocks.”

“The American love affair with stocks is deepening as everyone from frenetic day-traders to staid institutions dive further into the market,” Lu Wang wrote, adding that “the cost of missing out is looming large on investors’ minds [and] valuations rivaling the dot-com era [have] proved no hurdle to risk appetite.”

Measuring from March 23, 2020, the day the Fed unveiled its corporate bond-buying program, the S&P is up 75%, marking the best start to any bull market ever, with but one exception from the Depression era.

Of course, the impetus for equities’ ongoing rally is different these days. Now, it’s about fiscal stimulus, vaccine rollout, reopening, stable government, and a return to some semblance of “normalcy” on multiple fronts, not least of which is the economy.

But the lesson from 2020 is clear enough: The Fed is prepared to literally guarantee investments in corporate America. They didn’t need to buy stocks. The credit backstop was good enough, partly because it signaled that if “necessary,” equities could be purchased too.

Coming full circle, some say my friend is wrong. Some contend that you can’t necessarily count on higher stocks. Or at least not as an immutable law.

I’ve even heard it hasn’t always been the case historically that stocks rose every year. Someone said there have been actual, real instances of stocks falling over a 12-month period. Some people, since committed, spread a rumor once that stocks dropped. That’s why we have medications and, failing that, padded rooms and straitjackets.

Years ago, I passed a lunatic on 42nd. He grabbed me by the arm. I could smell the Kamchatka bleeding out of his pores. “Total returns can be negative,” he half-whispered, his one working eye darting hither and thither.

I shrieked. “Unhand me, drunken fiend!”

“You have been warned,” he said, his raspy voice rising, before a dastardly cough cut him off.

I dusted off my woolen topcoat, checked to be sure he hadn’t made off with my pocket watch, and hastened away.


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20 thoughts on “Just Put It In Stocks

  1. A thought: What if the Fed is intentionally engineering one of the great asset bubbles of all time so as to fatten the 401ks of boomers and help assure them they can afford to ditch the rat race and head south to The Villages, or wherever, clearing the employment decks for the huge and increasingly restless millennial and Gen Z cohorts? It might just be me, but I am noticing a definite uptick in retirement announcements from folks who have been at it 30 or more years.

    1. The Baby Boomers got lucky again. The Fed-engineered recovery in equities would have been successful had the Fed only stopped a 1929-event from occurring. An $SPX recovered to 3100 to 3200 for year end 2020 would have been a miracle enough. We instead got an overshoot, some might say.

      But, hey, too late now and I guess we’re all the better for it, unless you are the opiate-addicted, homeless bum with a bad back, who lost his job and family years ago, and lives on $700 a month in SSI disability.

    2. The ‘market’ is now the proxy for the economy. Financial action makes the front page every day, not economic news. Whatever moves Powell and Yellen make will be judged by what happens to the financial markets. Why? because the market is where most of the unequal distribution of wealth is held and the wealthy are driving the bus.

  2. Incidentally, the very last part of this article is supposed to be funny. That isn’t one my signature, slice-of-life vignettes. It’s fiction. And it’s purely for comedic purposes.

      1. Funny you mention the watch. I thought about that.

        I would find the The Grandmaster Chime too Brahmin establishment for someone who ultimately in life found comfort writing for friends…and also for strangers, strangers who hang in the peanut gallery and drink warm PBRs while reading the entertainment.

        For this reason, I was thinking of the modest offering that is the Patek Calatrava Reference in Pink Gold.

    1. Beginning to end, the tone of this piece reminded me of Joe Kennedy’s famous explanation of why he went to cash before the 1929 crash:

      “Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely.”

      After years of reading H I’m aware that history doesn’t repeat itself (but it rhymes); that you can’t fight the Fed; that every cycle is different and that modern financial engineering has changed the face of capital .. so I don’t mean to imply that we’re headed for another 1929-style crash.

      However: the sentiment from the man on the street, lunatic or not, does seem to rhyme pretty well with peak-of-the-bubble sentiments from a century ago.

  3. I get what she is saying,
    I have zero allocation to bonds. Instead, my goal is this-
    in a worst case scenario, I can cut living expenses here and there and live off 80% of the dividends (in case dividends are also cut). I have cut my fixed living expenses a lot over the past few years.
    My “blue chip” dividend stocks have gone up some, but not much, since I redid my portfolio (later part of 2020)- but that is ok.
    Maybe my portfolio won’t go up every single year, but I will be able to hold until it does.

    1. I sold out of all my bonds as well. Selling out of bonds in 2020 was one opportunity, a rare one at that, for retail to front run institutions…and dare I say even front-run the “forever-rapacious for fools’ money” hedge funds.

      There’s nothing wrong with a Blue Chip dividend strategy. I should be so lucky some day to live comfortably off 80% of the dividends paid by such firms.

      This all said, 2021 might be a year for the record books for buybacks and dividend hikes. We’ll see.

  4. I’ll be interested to see the total return in 2024. Let’s all meet back here and see how it turned out.

    In the meantime, SPX 6000, here we come. 2,000 likely to follow.

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