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Current Market Observations

November 17, 2020 | Weekly Commentary

by William Henderson, Vice President / Head of Investments
Question: What do you get when you mix $19 trillion of cash with a vaccine for COVID-19 and a divided U.S. Government? Answer: The potential for a seriously bullish market. M2 or the measure of the Money Supply of the United States currently stands at $19 trillion, up from $15 trillion in November 2019. M2 is the sum of all cash held by consumers and companies, plus money market accounts and bank deposits, and all “quasi-cash” balances such as Eurodollar deposits. M2 stands at a record level and represents the cash on sidelines ready to be put to work either by investing or spending. Cash balances are high as a direct result of COVID-19 restrictions and consumers who have simply not been able to spend. On Monday (November 16), Moderna Inc. announced that its vaccine for COVID-19 is 94.5% effective in primary testing. This announcement comes one week after Pfizer announced that their vaccine for COVID-19 was 90% effective in clinical trials. This is good news for consumers who have stayed on the sidelines, not spending or investing, due to fears of contracting the virus. A safe, effective and widely distributed vaccine for COVID-19 has the potential to release $19 trillion into the U.S. Economy.

The U.S. Presidential Election is largely decided, although we are still awaiting a run-off for two U.S. Senate seats in Georgia. Currently, Real Clear Politics has both seats leaning Republican allowing for divided government, which the markets sometimes tend to favor. 

Last week’s market returns were mixed as investors slowly moved away from tech-heavy NASDAQ equities to more consumer related equities that make up the broader S&P 500 Index and the Dow Jones Industrial Average. The week ending November 13, 2020, had the Dow Jones Industrial Average returning +4.1%, the S&P 500 Index +2.2 and the NASDAQ (-0.6%). After last week’s moves, year-to-date returns are positive for all three market averages with the Dow Jones at +3.3%, S&P 500 Index +11.0% and the NASDAQ at +31.8%. In a year like 2020, with all the uncertainty and cataclysmic events, to have all three major market averages in positive territory certainly points to the resiliency of the U.S. economy and the forward-looking nature of markets. We’ve said before that the market is far more efficient and forward thinking than investors may give it credit. 

The Federal Reserve remains committed to providing liquidity and stability to the markets by keeping short-term interest rates near zero. Conversely, yields on the benchmark 10-year U.S. Treasury Bond continue to move higher little by little each week. After bottoming in August 2020 at 0.51%, the 10-year U.S. Treasury Bond stood at 0.92% as of November 16, 2020; but this level is dramatically lower than year-end 2019, when it stood at 1.92%. Watch for U.S. Treasury Bonds to fluctuate as the markets waffle between the news of higher infection rates of COVID-19 and further information about the release and distribution of an effective vaccine. The markets are digesting a lot of conflicting and impactful information all the while pointing to an eventual outcome of a massive release of cash into the economy. Timing remains uncertain but the outcome does not; which confirms the value of sound financial planning coupled with clear long-term thinking.