Vaccines, Volume of Money, Valuations
With the continued increase of the number of people getting the vaccine a much-welcomed sigh of relief is being felt across the country and most of the globe. Thankfully thus far the variance seems not to pose a terrible threat and most continue even post vaccine to take the appropriate precautions. This is leading to a slow Opening of the country and a light at the end of the tunnel heading back to some type of normalcy.
Volume of Money
The Federal Reserve (FOMC) led by Chairman Jerome Powell continue to buy assets at the rate of $120 billion a month. With a main goal of lowering the Unemployment rate, these funds of course are giving a boost to Capital Markets and providing massive volume liquidity.
Additionally, the Fed has short term rates at zero and has stated they intend to keep them there for some time. This is also a stimulus for certain parts of the economy, but also a boosting effect on Asset Prices.
With Fed controlled short interest rates being held low, longer term rates, notably on the 10-year US Treasury have been moving up in minor protest by bond vigilantes that economic stimulus may be too much, fortunately at this time there seems to be no effect.
With the FED on record saying that short term rates are deemed to stay low, their first move back to normalcy maybe to pair back the purchases. Our interest will be, when, and if this occurs, and more importantly, capital market participants reactions.
As mentioned, multiple times in our blog at www.street-cents.com and again our Q2 2021 Newsletter, valuations by almost any metric are stretched.
While valuations may be a more somber note, the re-opening and vaccine completion rates should dribble into corporate earnings, the ultimate driver of capital markets and possibly provide a wonderful “Grow into our Valuation” affect.
If you asked us for our candid opinion, we would like capital markets to trend sideways while we grow into our valuations. Continued rise in capital markets could lead to a bumpier ride once the Fed adjust their policy.
We of course will be watching carefully! �
John A. Kvale CFA, CFP