Market Update: Jun 11 2020
- Market Drivers
- Federal Reserve
Here is a recap of our live Q&A session held on 6/11/20 presented by Joe Randazzo JD, CFP® from FNA Wealth Management and Dave Stone CPA, CFP® from Tartan Wealth Management. Please join our next Q&A on Thursday, June 18, 2020 at 10 am.
Details for our next event can be found here
What is driving the stock market to its recent levels?
There are a number of factors that are moving the market over the past few weeks. As we have previously discussed the market has been closely tied to the reopening of businesses across the country. This has created investor optimism that an economic rebound is in process. The jobs numbers from last week were an upside surprise which may indicate that we may experience a faster than expected economic rebound. This has also sparked the financials, cyclical, and smaller capitalization stocks to continue their rally. The value stocks as measured by the Russell 1000 value index is continuing to make up ground on growth stocks in YTD performance. The breadth of the market has started to widen as more names are participating in the market rally. We believe this continued breadth is a good sign for the overall health of the market.
How does the Federal Reserve impact the stock market?
The Fed has been buying bonds which helps keep bond yields lower. The theory is that if bonds yields are low that investors are more willing to buy stocks. As stocks are bought it can drive the market higher. The Fed does not buy stocks only bonds. They buy bonds to create liquidity in the bond markets which serves as not only as a device to try to keep interest rates low but to also create confidence in investors. The more confident that investors are that the Fed will provide a liquidity backstop the more likely they may be to invest in stocks. A lack of liquidity often creates severe pricing dislocations that impact both stocks and bonds. The Fed has indicated that they are prepared to continue to provide liquidity in the bond market as long as necessary.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Beacon Financial Advisory or Lincoln Investment. The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.
Small cap stocks may be subject to a higher degree of risk than larger, more established companies’ securities, including higher risk of failure and higher volatility. The illiquidity of the small-cap market may adversely affect the value of these investments so those shares, when redeemed, may be worth more or less than their original cost.
Growth funds focus on companies that managers believe will experience faster than average growth as measured by revenues, earnings, or cash flow. While growth funds are expected to offer the potential for higher returns, they also generally represent a greater risk when compared to value funds. They tend to do better than the overall market when stock prices in general are rising, while underperforming the market as stock prices fall.
The goal of value funds is to find proverbial diamonds in the rough; that is, companies whose stock prices don’t necessarily reflect their fundamental worth. In general, value funds focus on perceived safety rather than growth, often investing in mature companies that are primarily using their earnings to pay dividends. As a result, value funds tend to produce more current income than growth funds, although they also offer the potential for long-term appreciation if the market recognizes the true value of the stocks in which they invest.
The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. The Federal Reserve System is composed of 12 regional Reserve banks which supervise state member banks. The Federal Reserve System controls the Federal Funds Rate (aka Fed Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy.