I was surprised as anyone to see the stock market erase its 2020 losses last week in a remarkable reversal of the COVID-19 doldrums. Certainly the trillions in Federal stimulus spending and ‘loose money’ from the Federal Reserve has a lot to do with it.
Minneapolis Federal Reserve Chief, Neel Kashkari – who had been involved in the 2008 TARP program and Fed initiatives during the Great Recession – was on CBS 60 Minutes two months ago promising unprecedented liquidity to businesses & banks to get through this year’s Great Lockdown. The Fed recently announced that they would keep interest rates near 0% until 2022.
That is some economic helping hand.
Since this is at least the third straight economic disaster (9/11, Sub-Prime Lending, & Coronavirus) that the government has spent trillions to protect businesses, shouldn’t we be valuing the stock market differently? Has the government effectively derisked stock market investing such that it warrants a bigger share of our portfolios going forward?
You might recall at the beginning of the market fall in late February, I noted that the Shiller PE Ratio was quite high compared with its historical range. Here’s where is sits now … 28.5 …
I expected that in addition to the short-term CV-19 impact, we were overdue for a correction into the 20-25 range. That might still happen, but perhaps the Fed’s fast relief over and over again have investors feeling like the stock market is an increasingly safe haven that gets special status when things go wrong?
For my part, I’m keeping my investment allocation the same. Even if Congress & the Fed wanted to keep the easy money coming, there has to be some limit to what they can do. With interest rates already at 0% and the 2020 deficit approaching $4T this year, I have to believe that limit is close. At my age and our financial position, it is more important to protect what we have than try to squeeze out extra growth by betting on the government.
What is your take on the historically high market PE ratio?
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