The S&P 500 index fell 3.9 percent in September and experienced the first ten percent correction – from the month’s intraday high to the intraday low – since the rally began in late March. Despite the decline, the S&P 500 gained 8.4 percent in the third quarter as economic momentum picked up, the Federal Reserve flooded the markets with liquidity, and the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) provided much needed stimulus.

However, the markets fell under pressure due to a host of issues including the slow progress on the second round of COVID relief, the looming presidential election, the death of Supreme Court Justice Ruth Bader Ginsburg and the expected political battle over filling her seat, and fear of a second wave of coronavirus shutdowns.

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The S&P 500 index closed at 3500.31 as of August 31, 2020, up 7 percent in the month of August and up 8.3 percent year-to-date. The yield on a 10-year U.S. Treasury Note was 0.72 percent, an ounce of gold closed out the month at $1973.90 after topping $2000, and a barrel of West Texas Intermediate oil was $42.82. The U.S. dollar fell a little over 1 percent in August and is at the lowest level since April 2018 relative to a basket of foreign currencies.

Despite the ongoing challenges related to COVID-19, the new high in the S&P 500 is due to the unprecedented monetary and fiscal support by the Federal Reserve and Congress. Moreover, the Federal Reserve literally changed its monetary policy rules last week, which will have a meaningful impact on markets for years to come.

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The S&P 500 index gained 5.5 percent in July, adding to the second quarter rebound of 19.9 percent despite the fact that Gross Domestic Product (GDP) fell at an annualized pace of 32.9 percent in the second quarter. This stark contrast between the underlying economy and the markets is due to the seismic shift in Federal Reserve policy.

The Eurozone economy contracted by 12.1 percent in the second quarter, which ultimately led to the European Union approving a $2.06 trillion spending package. The German economy, Europe’s largest, fell by more than ten percent in the second quarter.

China’s GDP reportedly rose at an unlikely 3.2 percent from a year ago following the 6.8 percent decline year-over-year in the first quarter. We say “reportedly” as a good portion of the global economy was shut down in the second quarter, making that number suspect.

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If you want to improve your returns in the stock market, we believe you should pay close attention to what the Federal Reserve is doing because liquidity moves markets. Doing so will do wonders for your wealth.

Unfortunately, when it comes to the stock market, a majority of investors underperform in good markets and challenging ones because they fail to focus on the most important factors.

Since the financial crisis a decade ago, the U.S. stock market has gone down, but it has yet to stay down. A major reason for that is the Federal Reserve and the supply of money.

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The S&P 500 index rebounded from a 5.9 percent drop mid-month to finish up 1.8 percent in June, continuing the rebound due to the massive injection of liquidity from the Federal Reserve since March.  The rising tide of liquidity has levitated everything from oil and gold to penny stocks and even bankrupt companies.  

The price of gold approached the $1800 level, which it has not reached since 2011.  In May, Hertz rental car company filed for bankruptcy, hurt by ride-sharing businesses such as Uber and Lyft, as well as the virtual shutdown of business travel due to COVID-19.  Nevertheless, demand for the bankrupt company’s shares was so strong, a federal bankruptcy judge approved the sale of up to $500 million worth of stock before the Securities and Exchange Commission (SEC) weighed in. 

Clearly, these are not normal times.

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Optimism towards the economic re-opening and a pledge by Federal Reserve Chairman Jerome Powell “to use our tools to the fullest until the crisis has passed” helped the S&P 500 index gain 4.5 percent in May.  Oil prices bounced back from severely oversold levels and the yield on the 10-year U.S. Treasury Note fell to 0.65 percent.

However, that optimism was replaced by shock and dismay over the senseless death of George Floyd in Minneapolis, which sparked protests and riots in a number of large U.S. cities.  While the friction regarding the re-opening of the economy was likely to be anything but business as usual due to many new restrictions, numerous mass protests, curfews, and general unrest are likely to create additional challenges.

These are clearly unprecedented times.

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In the financial markets, liquidity often has a much greater influence on prices than other variables.

For example, liquidity was a major reason why the S&P 500 gained 9.5% in 2016 although earnings per share rose by less than 6 percent, and why the S&P 500 fell 6.2% in 2018 despite earnings per share rising 21.7 percent.

The waterfall decline in March as a result of the COVID-19 and subsequent shelter-in-place orders was offset to some degree in April by the colossal support from the Federal Reserve and a series of Congressional relief programs totaling trillions of dollars.  The S&P 500 index rallied 12.6 percent in April.

It was not without pain, however, as the price of a barrel of oil in the futures market traded at minus $38 for the first time in history as the collapse in demand caused storage facilities to operate near capacity.

 As a reminder, the unprecedented government-mandated shutdowns in many states were due to virus models that estimated as many as 2.2 million deaths in the U.S. alone.  Therefore, in order to prevent the healthcare system from being overwhelmed, according to the experts, drastic measures were needed.  The goal was to “flatten the curve,” which has caused devastating collateral damage to the economy and untold personal and financial hardships.

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In light of the ongoing coronavirus (COVID-19) situation, we hope that you and your families are well and are staying safe.  Given the unprecedented nature of recent events and the shock that the virus has had on the economy, markets, and peoples’ lives, March 2020 will not soon be forgotten as the coronavirus wreaked havoc on the healthcare system, the economy, and the markets.

Given the devastating impact of COVID-19, we want to provide some context that we believe is critical to understand where we go from here.

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