Like an Orc being swept away by the raging waters following the destruction of a dam, short markets are struggling to find stability. Despite the continuous chatter from market experts about the economy being overvalued and drawing comparisons to past crashes like the Tech Wreck of 2000-2002 or the Financial Crisis of 2008-2009, the market is persistently moving upward. Should investors be afraid? We believe not. This could potentially mark the beginning of a truly historic bull run. While it may end unfavorably in the future, that day may be far off. Let’s first examine the state of the economy. Regular readers are likely familiar with the work done at www.econpi.com, as I have referenced it numerous times in the past. As a quick refresher, http://www.econpi.com provides a helpful graphic illustrating the current state of the economy, and by examining past graphs, one can clearly see where the economy has come from. In the words of James Carville, “It’s the Economy, Stupid.”

Here is where the economy stood before the Covid-19 outbreak: the Red MOC (Mean of all the data coordinates) and the Green LD (Leading Indicator) plots were situated in the economic expansion quadrant. The average for June clearly indicates a recession for both May and June. And here is the data for the first week of July: we have transitioned into the recovery quadrant. This is a significant change within a week. Despite concerns about economic shutdowns, there seems to be a general consensus that with the use of masks and social distancing, most businesses, excluding bars and fitness clubs, will reopen, even on a limited basis. Many experts claim that it will take years for businesses to return to normal. However, I strongly disagree. The surge of consumers flocking to beaches, restaurants, and bars suggests a desperate desire to return to normal life. The main exceptions I see are the airline and cruise industries.

“Don’t Fight the Fed” is perhaps the one universally sound piece of advice for investors. Federal Reserve Chair Powell has stated, “The Federal Reserve is strongly committed to using our tools to do whatever we can for as long as it takes to provide some relief and stability to ensure that the recovery will be as strong as possible and to limit lasting damage to the economy… The Fed will continue to use these powers forcefully, proactively, and aggressively until we’re confident that the nation is solidly on the road to recovery.” (Congressional Testimony on 6/30/20) How forceful is the Fed willing to be? They have already announced the creation of facilities to purchase corporate bonds, asset-backed securities, ETFs, and they have instructed Blackrock to buy individual securities for the Federal Reserve account, despite none of this being allowed by the Fed charter. Hence, the reference to the dam breaking. The Fed now has seemingly unlimited resources to print money, thanks to the adoption of Modern Monetary Theory by this administration. There is theoretically no limit to money printing until the economy regains full employment. The dam has indeed burst.

Let’s hear it from another source, hedge fund billionaire and owner of the Milwaukee Bucks, Marc Lasry, who stated in a Market Watch interview, “I know you’re not supposed to say this, but it’s a once-in-a-lifetime opportunity. You’re not going to see this again: Where you’ve actually got an economy that’s fine, and you’ve got a Fed pumping trillions of dollars in.”

Of course, there are always concerns, and prudent investors must remain cautious. Expect volatility, especially in the coming weeks as second-quarter earnings are announced. The market is gathering fuel like a California forest waiting for a lightning strike to ignite it. What could be the lightning for the market? Hopefully, a treatment or vaccine for Covid-19 that becomes readily available to the public.

A word of caution: predicting the market’s volatility over the next six months is anyone’s guess. With constant news about Covid-19, the upcoming election, riots, and protests, daily fluctuations could be severe. Personally, I believe the biggest test will be whether schools open and remain open in the fall. The absence of schools and football would undoubtedly be a significant psychological blow. If you currently have cash on hand, we strongly recommend taking advantage of various entry points over the next few months. No one can accurately predict the short-term outcome, but the long-term outlook appears quite bullish.

Please note that Mr. DeShurko is the Managing Member of 401 Advisor, LLC, an independent registered investment advisor, and Jim Kilgore CFP ® is an Investment Advisor Representative of 401 Advisor, LLC. They are also registered representatives of Ceros Financial Services, Inc. (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor. The views expressed in this content are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees, or affiliates. Past performance does not guarantee future results. All investments involve risk. The mentioned investments are not specific buy or sell recommendations without considering an investor’s entire portfolio or investment objectives. Consult with an investment professional before making any investment decisions. Be sure to check out Jim’s new podcast: https://podcasts.apple.com/us/podcast/401-advisor/id1511923745. Please email either of us with your questions, and we will address them in future podcasts.