The Stock Market’s Rally Should Continue

Investors always need to think about where the “ball” is heading, not where it is…

We don’t want to get caught up in the here and now. If we do that, we could get trapped in all the noise generated by the media and let our emotions get the better of us.

Investors should never let emotions get the better of them.

Of course, that’s much easier said than done in the middle of a pandemic, in a roller coaster year for the markets, and at the tail end of a contentious presidential election.

Now that Joe Biden is confirmed as our president-elect, the market is seeing wild swings as folks wonder what his administration will bring.

Will we see an aggressive green energy agenda? Are taxes about to skyrocket? Are we looking at massive regulation of industry?

In the meantime, the economy is rebounding… The Federal Reserve is determined to keep the financial system flooded with dollars while maintaining low interest rates… And we could begin distributing COVID-19 vaccines by April or May.

That’s why it’s so important to take the emotion out of investing.

Despite how one may feel about the election results, a number of positive tailwinds are lifting the economy right now. That should bode well for the S&P 500 and the Nasdaq Composite indexes.

But don’t take my word for it. Let’s look at what the institutional money flows are telling us…

First, let’s look at the domestic M1 money supply – a measure of households’ most liquid assets or funds available for spending. It includes traveler’s checks, demand deposits, and other checkable deposits.

This indicator continues to make new records. Take a look at this chart from the Federal Reserve Bank of St. Louis…

As you can see, household cash grew by around $1.7 trillion over the past 10 months. That’s the opposite of what one would expect during a recession, let alone a pandemic… let alone both at the same time. But this speaks to the spending power of the U.S. consumer today.

Next, let’s look at the Investment Company Institute (“ICI”) Money Market Mutual Fund Assets. This is a safety gauge. When investors are uncertain, they tend to flee to cash. As you’ll see in the next chart, the flow of funds into money-market accounts (the equivalent of cash) exploded higher back in March.

When the market crashed, individuals sold much of their investment portfolios to seek the shelter of an investment that wouldn’t “blow up” on them.

The problem with staying in cash, though, is that you’ll eventually start missing out on returns. At some point, that money begins to seek higher yields. As you can see, those “safety” funds have started to fall…

But what’s even more interesting is what happens to the S&P 500 when that rotation begins. As you can see in the next chart, the stock market roared to life, while ICI money market mutual funds began selling off…

Roughly $1.1 trillion went into these safety assets between March and May. Since then, only about $400 billion has come back out. That means a lot of cash is still out there, ready to chase higher-yielding assets.

At the end of the day, we want to avoid the emotional drama of the moment and stick to the facts.

Because of the COVID-19 pandemic, many of us are working from home. We’re in front of the computer and TV more, and we’re constantly checking our preferred news sources. But remember… our preferred news sources are “preferred” because they cater to our existing beliefs. They tell us what we want to hear. They are designed to evoke some sort of emotional response.

As humans, it’s easy to get caught up in that. As investors, we must divorce ourselves from it as best we can.

After all, the idea behind investing is to preserve and grow our wealth. By taking the emotion out of investing and focusing on what the big money trends are telling us right now, we can see that assets are flowing out of safety plays.

That means they’re heading back into risky assets. And that should continue to support a rally in the S&P 500 and Nasdaq Composite indexes going forward.

Good investing,

— C. Scott Garliss

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Source: Daily Wealth