The global economic recession which kicked off towards the end of the Bush presidency and the beginning of the Obama presidency reached a nadir around March 9, 2009. At that point in time, the SPX closed at 676.53. Fast forward to the present day, the SPX currently stands at 3,934.83. The financial charts don’t lie.
There has been a clear and unprecedented upswing since 2009, fuelled largely by government-backed programs to stimulate economic growth. A series of massive stimuli, backed by Federal Reserve Bank bond-buying programs and quantitative easing have facilitated a booming US economy.
During the Obama presidency, from 2008 – 2016, the QE programme embarked upon large-scale purchases of securities and Treasury bonds. The financial crash that began with the sub-prime mortgage crisis and heralded the collapse of Lehman Brothers was a massive global economic catastrophe. The Federal Reserve Bank acted quickly to shore up confidence in the economy by cutting interest rates to 0% – 0.25%.
Before QE kicked in, the Fed owned $477B of federal government-issued debt, out of a total of $5.8 trillion. This amounts to 8% of all federal debt. After the stimulus policies enacted by the Fed and the government, the Fed injected $900 billion + $292 billion + $800 billion into the economy. In terms of percentages, the Fed owned $2.5 trillion worth of Treasury securities, amounting to 18% of all debts.
Source: Dow Jones Industrial Average 2008 – Present Day
The objective of these monetary policies was to lower the cost of borrowing, to hyper-stimulate the economy to get businesses back into the swing of things. Since the global financial crisis, the world economy has been with it characterized by historically low, sometimes negative, rates of interest. The Fed also purchased $1.8 trillion in mortgage-backed securities offered through Fannie Mae and Freddie Mac, between 2009 – 2016.
All of this money flooding the markets had to get soaked up into the economy. The funds found their way into savings accounts, fixed-interest-bearing accounts, retirement accounts, stock markets, debt repayments, living expenses, et al. The Dow Jones Industrial Average (DJIA) enjoyed unprecedented gains in the 12 years since the financial crisis hit.
Stock Market Gets a Massive Boost from Government-Backed Stimuli
During the Trump presidency, 2016 – 2020, the coronavirus pandemic struck in December 2019, and has roiled financial markets and ravaged the global economy ever since. To combat the massive decline in global demand, governments and central banks around the world have pushed the largest stimulus packages ever in history.
In the US, tens of millions of workers were furloughed, businesses shuttered operations, and economic activity ground to a halt. Were it not for the concerted efforts by the House, the Senate, and the Executive, financial ruin would have ensued. At $4 trillion, the tax breaks, loans, grants, and bailouts were the largest stimulus ever to be passed in the US.
Some $2.3 trillion was allocated to businesses, $651 billion in tax breaks, and $454 billion was allocated to the Federal reserve to stabilize financial markets. The PPP (Paycheck Protection Program) allocated $670 billion towards businesses impacted by the coronavirus. State governments and public agencies received a total of $253 billion, and $884 billion (approximately 20%) of relief when two workers and their families. Additional stimulus was passed, and it will pass again under Biden.
Stock markets around the world collapsed in March and April 2020, following consecutive months of global shutdowns, amid a rampant novel coronavirus pandemic. The quick response of governments around the world to lockdown their countries to foreign visitors, quarantine the sick and infirm, and attack the virus with every single resource available in the medical, pharmaceutical, scientific, public and private sector paid dividends.
While the loss of human life has been horrifying, governments have gone to great lengths to shore up economic activity to prevent the worst possible scenario coming to light: collapsed economies around the world. The stock market boom has been fuelled by a glut of new traders to the scene, many of whom heretofore had no interest in trading the financial markets.
The coronavirus created new economies, new realities, and new ways of doing business. In person was replaced by virtual, and seemingly moribund SMEs came roaring back to life with new ways of doing business.
Many business sectors were able to successfully transform operations during the pandemic. These include therestaurant industry, VR sector, the retail industry, e-learning, remote working, entertainment, pharmaceuticals and medical devices, virtual healthcare, contactless technology, logistics, and electronic transfers.
Impact of the Pandemic on the Financial Markets
There can be no denying the devastating effects of the pandemic on economic activity. Government imposed shutdowns have all but eviscerated the energy industry, causing the prices of crude oil, natural gas, and coal to plummet. These commodities enjoy rising prices with increasing demand. With shrinking demand and reduced supply, many energy companies have closed up shop completely.
Yet, the failure of energy companies has been a boon to the fittest operators, by removing excess supply, and shoring up the existing capacity with the companies who remain. Major energy titans like Texaco, Exxon Mobil, Shell, British Petroleum, and the like have been able to keep themselves afloat by way of massive reserves, government-backed loans and stimuli, and diversification strategies.
While travel and leisure stocks plunged (Carnival Cruise lines, Royal Caribbean, Princess, Delta Airlines, American Airlines, British Airways, Virgin Atlantic, Boeing et cetera), other commodities like gold have boomed. The likes of SPDR GLD, Barrick Gold, Newmont Corporation, Rio Tinto plc, and others have enjoyed strong gains. Much the same is true of platinum.
But the biggest winners during 2020, and in the opening quarter of 2021 remained the tech stocks. The performance of the NASDAQ composite index is a case in point. The election of Joe Biden to the highest office has brought with it a reshuffling of priorities vis-a-vis how the US will approach technology moving forward. A focus on green energy is the order of the day. This puts many oil, coal, and natural gas companies in a spot of bother, but it puts companies like Tesla, myriad solar-focused companies, and alternative fuel SMEs in the spotlight.
Given this new green focus, the stocks to watch for February include the likes of Greene Concepts Inc (OTCPK: INKW), a company which sells bottled water and recently sold out all of its supplies on Amazon. Another company with a forward-focus is Alternet Systems Inc. (OTCPK: ALY) which has been manufacturing ReVolt Electric Motorcycles, and yet another is a rather interesting turnaround with Barrel Energy Inc (OTCPK: BRLL) which was in the oil and gas sector, and now manufactures lithium-ion batteries.
For the full year ending December 31, 2020, the NASDAQ gained 43.2%, its fifth best year in recorded history. The Dow Jones Industrial Average gained 7.3%, and the S&P 500 index rose 16.3%. The performance of the NASDAQ is extraordinary, given the hullabaloo that ensued during the year. The tech-heavy index was led by strong performers such as Google, Netflix, Apple, Microsoft, Amazon, Tesla, Facebook, all of which comprise an agglomerated chunk of the NASDAQ.
Innovation, particularly cloud computing, sophisticated IoT technology, and the imminent roll-out of 5G across the board are expected to be the paradigm shift in the economy, led by the tech sector. Electric vehicles, driverless vehicles, robotics, virtual meetings, computing capabilities, and wearable tech are certainly exciting and potentially lucrative fields for the new economy.
How Long Will the Bull Market Last?
That’s the $100 million question that everybody wants to know. We already know that there are several gauges to use to assess the mood of the market, including speculative sentiment, unemployment numbers, inflation forecasts et al. One of them is the VIX (volatility indicator). The CBOE volatility index gauges the performance of the market in real time and determines the level of risk in the markets.
When the VIX is rising (when it’s high, it’s time to buy), there is increasing volatility and traders and investors tend to buy up stocks. When the VIX is falling (when the VIX is low look out below), that tends to be a signal that there will be future volatility, which spurs selloffs. Currently, the VIX is at a level of 21.53, up markedly since the previous close. The VIX is an important economic indicator with regards to stock market expectations, and volatility.