Lately, the bullish sentiment has been growing.
More and more investors are rushing into the stock market lured by the extraordinary returns we’ve seen in the last two months.
Indeed, my March True Retirement Wealth recommendations are already up by 27% and 50%.
But rallies like this are typically followed by sharp corrections. That is why, two weeks ago, I warned you that this looks like a FOMO (Fear Of Missing Out) trap and that you should stay on the sidelines.
Still, with many stocks close to all-time highs, I think I should explain in more detail why they are rising so rapidly and the bullish forces behind them.
Bull Case For Stocks
As was the case with most bull rallies of the last decade, the primary force behind this one is the Fed.
Not only has the central bank lowered the interest rates to zero as a response to the crisis, but they’ve also initiated a new quantitative easing program— “QE infinity.”
In simple terms, what the Fed has signaled with this new QE program is that it’s willing to print an infinite amount of cash to bring the economy back to normal.
But the Fed didn’t stop here. It went one giant step further. It promised to start buying high-yield bonds—another unprecedented move.
By doing this, they help companies at risk of default to secure the much-needed debt to survive this crisis. Furthermore, this policy should prevent a large wave of bankruptcies that typically happen during recessions.
The Fed’s effect on the stock market is, without a doubt, enormous, but what added even more fuel to this market rally was the Congress.
Since the start of the crisis, the U.S. government has passed several stimulus packages, which together amount to about $3 trillion. To put that in perspective, that’s roughly 15% of the U.S. yearly GDP.
As you can see, between the Fed’s and the Congress’ unprecedented actions, it’s natural for the market to rally as strong as it did.
Moreover, there are arguments that this trend will continue.
First, “QE infinity” is unlikely to end at least for another year. Meaning, the Fed will print even more money.
Second, we are likely to see more fiscal stimulus from Congress. The one they are currently discussing is worth $2 trillion. And as if that isn’t enough, the White House recently suggested an additional $1 trillion tax break.
And third, investor participation in this market rally has been low. Money market funds, a place where you hide your money during times of uncertainty, have about $2 trillion more assets than in February. That money will eventually flow back to stocks once conditions improve.
All in all, these factors make a strong argument for the market to move even higher.
Why Investing Is Dangerous At This Point
But, the reality is that things are not as rosy as some investors would like.
The biggest issue I have with investing in this market is that it’s so risky.
None of the problems have gone away, and there’s no clear indication when that will happen.
The extent of the economic damage is anyone’s guess at this point, and even with all the government support, recovery will be slow and the effects long-lasting. So, it could take a long time for companies’ earnings to return to pre-crisis levels.
Moreover, it has become clear that our society will have to survive another flu season without a coronavirus vaccine. That probably means we will have to institute lockdowns again come fall. This will be extremely detrimental to the already-hurting economy and will result in high unemployment.
Finally, when you look at the valuations, many stocks are more expensive than before this crisis, which makes them prone to a sharp correction.
How To Play This Market
I’m not going to lie to you. This is an extremely complicated time to be an investor. There’s so much to lose on both sides.
With bearish and bullish forces looking equally powerful, my advice is that you position your portfolio so that you can win in any outcome.
If the market declines, you want to be holding some cash and some gold stocks.
Having some dry powder on the side will allow you to take advantage of any buy-the-dip opportunities that present themselves.
On the other hand, the countercyclical nature of gold will protect your holdings from declining too much.
A conservative investor should allocate 20% to each one.
The rest should still be in stocks. That way, you get to profit should the market continue climbing higher.
I recommend investing in the same names that have worked so far. That is high-quality tech and healthcare. The COVID-environment hasn’t fundamentally changed and will last until we find a vaccine, which could be over a year away.
Moreover, if you’re a dividend investor, there are many quality stocks you can buy right now with impressive yields.
I’m going to talk about one of them, which yields north of 6% in this month’s issue of True Retirement Wealth.
Subscribe today so you can get your copy as soon as I release it.