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What I Care About This Week | 2021 Feb 15

by Franklin J. Parker, CFA

The Summary

The Details

As we’ve discussed before, extreme market valuations are being supported by the central banks. Low interest rates and continued expansion of the money supply (printing money) serve to keep financial markets up. The latest round of stimulus proposals, then, are an important component of this continued market rally, and investors are likely to push prices around in response to any news surrounding it.

To fund stimulus, Congress authorizes the US Treasury to borrow money. In the past, it was investors (both domestic and international) who lent that money to the United States. In recent years, however, a significant percentage of that money is lent by the Federal Reserve. The Fed creates the money and then lends it to the US Treasury. In this scenario inflation becomes the major constraint on spending–higher inflation limits the Fed’s ability to print money, which limits the Treasury’s ability to borrow, and ultimately hinders Congress’ ability to spend. In the end, this pushes investors to watch inflation data very closely.

This is why markets are heavily influenced by central bank commentary (hence the importance of Fed minutes scheduled to post on Wednesday) and inflation data. Hints of the Fed pulling back spending would lead investors to push down stock valuations.

On the upside, earnings are posting generally better than expected. Most companies in the S&P 500 have posted results, and most of those are better than anticipated. Even energy, the laggard over the past year, has seen 2/3rds of companies post earnings which are better than expected.

It is my view that markets will continue to be bolstered in the coming months by the Fed and Congressional stimulus. There are certainly risks facing investors, and ultimately your goals and objectives will determine your course, but I see more upside than downside risk in the coming months. In my view (which can change in a moment, by the way), investors can use market dips as entry points.

Chart of the Week

As frigid temperatures grip the Southern US this week (parts of Texas are colder than Alaska!), energy markets have been sent on a wild ride! This week’s chart comes from Bloomberg, and it shows the spot cost per megawatt-hour of Texas electricity–a 3400% jump within a few hours. Oil and natural gas prices are also getting a boost from the sudden cold snap.

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