Why the Stock Market Keeps Going Up and What to Look Out for , The Stock Market and Your Retirement Portfolio

One of the big questions that I’ve received over the past six months is, Troy, why have you guys been forecasting the market to continue to rise? Why is the stock market continuing to rise when we have tax increases that are coming, unemployment numbers aren’t great, we’re printing so much money, we’re accumulating so much debt, how is the stock market continuing to rise?

In this video, I’m gonna explain one of the biggest reasons why the stock market has continued to go up, what you need to be on the lookout for, and what we see for the second half of this year.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, host of the Retirement Income Show, also a Certified Financial Planner Professional and Certified Tax Specialist.

So in order to understand why the markets been going up, first, we need context. So the best contextual frame to put this in would be the 2007 to 2009 recession. The stock market took about five years to recover back then. So that was what we call a structural recession, or systemic, it was a systemically caused or induced recession and stock market collapse.

What does that mean? Well, it means the banking system, the mortgage system, those were structural issues within the economy that caused everything to virtually collapse. Now, the stock market took almost five years to recover. If you had retired in 2007, or 2008, you went through a pretty bad experience if you were heavily invested in the market, because that’s when you start taking money out, and when you combine that with the stock market going down and taking some time to recover, it can be pretty scary. This is why risk management and appropriate allocation and several other aspects of retirement planning are so important.

But getting back to the context of what happened now versus what happened then and what’s going to continue to happen over the next several months, from our perspective, it’s important to understand and I’m going to visually show you this so you can get an idea of what caused a five year lag and recovery in the stock market back then, and why the stock market recovered so quickly from the Coronavirus recession.

Now, first off the Coronavirus was not structural, the banking system, the mortgage system, those were not collapsing. What was happening was we had what’s called an event driven recession. So an event like the Coronavirus shut the economy down, really came out of nowhere. Event driven recessions in this country typically last for around four to eight months, when you look at the historical record. First off, the primary cause of the recession was much, much different.

Now, the reaction that are the people in power in this country took also was much much different, which helped accelerate the stock market through. So we’re going to show you this, but then we’re going to relate it back to your retirement so you understand what to be on the lookout for when the stock market could possibly start to correct.

Before we dive into this video, I do want to take an opportunity to address a recent rule that the SEC has passed. Essentially, they’ve loosened the regulations on advertising and marketing and what this has done has allowed us to open up the comment section below. So first and foremost, I want to say thank you if you’ve been participating in the comments, we appreciate it, the interaction, the engagement, this helps us understand what type of videos to create. It also helps us grow the channel because YouTube likes when people are engaging with the videos that we put out.

So if you’d like to take a moment when this video is done, leave a comment, we’ll do our best to try to respond to as many of them as we can, one way or the other. Also, if you hit that subscribe button, you’ll be connected to us, there’s no cost, no fee to subscribe to the channel. It just simply lets you know whenever we upload new content. And of course, if you like the video, hit the thumbs up. If you don’t like the video, that’s okay, hit the thumbs down.

Okay, so first, when I talk about context, and I talk about what happened in 2008 and the response of the people in power, this is a large part of what’s driven the economy over the past 10 years.

Alright, what we have here is a chart essentially, a line graph, of how much money the Federal Reserve has printed, going back to 2004. So this is publicly available information, it’s on the Federal

Reserve website. And we see from ’04 roughly all the way up to 2008, we don’t see a lot of activity. Now the recession starts in the beginning here where the grey bar extends. So 2007 to 2009 was the recession, the stock market really started crashing in ’08.

The first thing I want to point out is it took almost a year after the recession started before the Federal Reserve started to support the financial markets. So when the Federal Reserve supports the financial markets, essentially they’re printing money, injecting it into the system, which creates a floor, creates some support for the financial system. They do it in various methods. The Federal

Reserve can lower short term interest rates or they can print money and buy bonds. This is known as quantitative easing.

So without all the technical jargon and trying to worry about confusing people, just think of it as they’re essentially printing money to support the financial system. This causes the stock market to increase in value, because there’s a lot less risk out there when you have essentially a floor of support from money being injected into the financial system.

So second thing I want to point out is the magnitude of what they did. Now, I’m not getting into the merits of whether this makes sense or doesn’t make sense, I’m simply providing an analysis of what’s happened. They increased the balance sheet from 1 trillion to a little over $2 trillion. So again, you’ve probably heard on the financial news or on television, people talking about the Fed’s balance sheet, this is what they’re referring to, how much money has the Fed printed, and then injected into the financial system and bought bonds. Those bonds that they buy go onto their balance sheet as an asset. This is a line graph of total assets from the Federal Reserve, but for the purposes of simple understanding, just think of it as printing money, because that’s what’s going on.

Now it’s not literally printed anymore, it’s digitally made up, but long story short, the balance sheet is increased. They took them about a year before they did anything, and then they injected about a trillion dollars, a little more than a trillion dollars into the financial system, then they continued along this path because it took so long for the economy to recover. We never really experienced greater than about 2% growth, on average, a little bit less than 2% if memory serves, from 2008 all the way up through about 2016.

Now, the Federal Reserve continued to support the economy. This was additional quantitative easing right here, and then things kind of leveled off. Now we see here, this is where the Federal Reserve started to consolidate, or not consolidate, but bring those assets down, so started to essentially tighten the money supply. They started to increase interest rates, they started to reduce the assets on the balance sheet. And 2018, if you remember, in the fourth quarter of 2018, as this is showing, as the balance sheet was reducing, the stock market was going down. We’ll show you that in a minute.

Now, the yellow over here, this is the Coronavirus crash. So immediately, first thing I want to show you is how quickly the Federal Reserve acted when compared to 2008. Not only did they act much more swiftly, but the magnitude with which they acted, the amount of money they printed and injected into the financial system was much, much, much greater. So we can see here the balance sheet goes from about 4 trillion to over $7 trillion, and it happens immediately, very, very soon after the crash.

So not only was the Coronavirus an event driven recession, we had immediate intervention on a magnitude we’ve never seen before in this country to support the financial system.

Now, since then, the Federal Reserve has announced their program to continue to put $120 billion per month into the financial system. They announced this some time ago. So when we’ve been talking about it, forecasting, what’s the stock market going to do, there were a few things going on.
First, we believed the vaccine was going to eventually come to market, be distributed and herd immunity would eventually be reached.

Number two, we believed consumer sentiment would improve as time went on.

But number three, the massive amount of stimulus from the Federal Reserve, on top of what Congress was doing, created an unprecedented level of financial support for the economy, but also the financial markets. Right now, the personal savings rate, if we look at that data on the Federal Reserve website, is over 31%. Historically, it’s been in between five to 10%. It’s unprecedented the amount of money that people have saved from all the stimulus that the government has done. This is why it’s harder for people to get back to work, because they’ve been able to save so much from the money that the government has essentially given to them.

Now, this is the 120 billion per month that the Federal Reserve has been doing for some time. They are going to continue to do this, at least they said they’re going to continue to do this, but that’s not it. While the Federal Reserve here in America is printing this much money and putting it into the financial system, so is the Bank of England, the Bank of China, the Bank of Japan, central banks across the globe are putting a combined over $300 billion per month into the financial markets, and this has been going on for some time.

So now if we overlay this, if we look at the S&P 500, maybe a little bit difficult for us to go back and forth, but I’m going to try here. So this is the S&P 500 over the past five years. This is a simple chart from Yahoo Finance. 2016 up and through 2018, the Federal Reserve isn’t providing a lot of support here, but President Trump came into office and investors assumed with the tax cuts on the horizon, with lower regulations, that businesses should perform better, that corporate profits should be up. And remember, if you’ve been watching this channel for any time, you understand that the stock market simply goes up based on the anticipation of the future of what corporate profits will be, what are the profits, and what is the growth rate of those profits. That is essentially all the stock market is. It is a discounting mechanism of the future cash flows and growth rate of those corporate cash flows, and consolidated into a single price for that security today.

So with lower taxes, with lower regulations, the assumption for most investors was that the stock market should rise. That’s what we see here in 2017. Now, this is where President Trump starts the trade war with China, and at the same time, the Federal Reserve has not or has said that they’re going to start to raise interest rates.

This is where we come back over here. So now we’re in 2018, not only is the Federal Reserve tightening the money supply, so they’re contracting the balance sheet, at the same time President Trump is also fighting with China. This is when the trade war was taking place with the tariffs.
So the stock market for 18 months literally goes nowhere, primarily because of the trade war and what the Federal Reserve was doing. Those two things were not helping economic activity.

Okay, so now I’ve highlighted a couple of points on both charts, it’s very important to understand this. So on the Federal Reserve chart, I’ve highlighted September 25th, 2019. And the reason I’ve done that is you can start to see the Fed balance sheet increasing here. So again, they said you know what, we’ve made a mistake, we should not have started to raise interest rates so soon, and they start to increase the balance sheet.

Looking at the same point over here, this is basically the end of an 18 month period where the stock market was flat, completely flat for about 18 months. So the market says you know what, the Federal Reserve is going to start being more accommodative, if you remember back to this timeframe, they were negotiating with China as well so most people believed that come the New Year, that there would be at least phase one of that trade deal in place.

So the market says, with the Federal Reserve being more accommodative, a trade agreement with China in place, we’re gonna start to go up and the market started to go up and 2020 was supposed to be an excellent year for the financial markets.

Well Coronavirus, as you can see, changed that dramatically. Coronavirus happens, this is highlighted February 24th. We see right here roughly February 19th is the beginning of the magnitude of what the Federal Reserve has done here. So as you can see, they inject a ton of money into the financial system, the stock market rebounds, and it has continued to grow since then, because the stock market knows that not only is the Federal Reserve putting $120 billion per month into the financial system, so are the other central banks across the world.

So in a nutshell, the reason why the stock market has been continuing to go up and why it will continue to go up in our opinion, is because so much money is being injected into the financial system to support it.

Now, what do we need to be on the lookout for? Well, the June meeting from the Federal Reserve, so they’re not going to stop putting money into the market, almost certainly, but what we’re going to be looking for is the language they use compared to the language that they used in previous meetings.
And what does that mean? Well, if they start to say we’re going to taper the asset purchases, or if inflation is becoming a concern, and we’re going to stop the quantitative easing that we’ve been doing. Now, they may not call it quantitative easing, they’ll probably refer to it as asset purchases, but ultimately, the language that they use during the next June meeting will give us more guidance as to how long this will continue.

Our belief is it will continue through 2021 and probably into 2022. There are some concerns long term. If we look at the national debt clock, so this is how much money do we owe as a nation, the money the Federal Reserve prints does count towards this number, $28 trillion. Now it’s such a large number it’s really unfathomable. But if I were to ask you, how long would it take you to count to just 1 trillion if you counted 1, 2, 3, 4, every second you counted, to get to 1 trillion, not 28 trillion, it would take you 32,000 years. So a trillion is a very, very large number. Right now we owe about 28 trillion of them.

But if we scroll down here, only about 7 trillion of our debt is actually held by foreign countries, which means about 21 trillion of that debt, we owe back to ourselves. Now, inflation is a concern, higher taxes are a concern. Obviously, down the road, a lot of these issues that have crept into the economy over the past 10, 15 years are going to have to be addressed. There’s no doubt about that.

When we look at our unfunded liabilities, so this is how much we owe in Social Security, future debt, so based on life expectancies, based on the number of people to receive Social Security, we essentially owe $21 trillion just to fund Social Security.

Medicare over $32 trillion. The total US unfunded liabilities right now 147, almost $148 trillion. So where are we going to get this money from? That’s a big, big question. But again, it’s not a question for today, or six months, or 12 months or 24 months. It’s a question for 20 years, 30 years, 40, 50 years. For today’s video, what is the stock market going to do over the next six months, 12 months, most likely, the stock market is going to continue to increase in value, because the Federal Reserve and the other central banks are going to continue to support the financial system.

Okay, key points here, let’s summarize. The reason we believe the stock market will continue to go up is because of how much money the Federal Reserve and other central banks across the globe are injecting into the financial system, which essentially provides a level of support for the financial markets.

Now, we want to pay attention to the language of the Federal Reserve and see how that language differs from past statements that they’ve made, in effect to the amount of money that they’re printing. So the asset purchases, what are their intentions with interest rates, when they start to consolidate the money supply, the most likely outcome is the stock market would start to go down. This does not mean we get out of the stock market. This does not mean we go to cash, especially if you’re in retirement or if you’re younger, especially, either scenario.

What it means is you simply need the portfolio to be positioned ahead of time, based on your needs, your goals and what you’re trying to accomplish, and have an investment strategy that’s built around your needs. That’s how you protect yourself against these market fluctuations. If you just have overly aggressive or high income yielding investments, yeah, there’s a good chance you’re going to be hurt, financially speaking. But if you have a plan built around your specific needs and objectives, that means the amount of money that you have at risk subject to these, isn’t going to be life changing, you’ll still be able to, the goal is to still be able to continue your standard of living.

So pay attention to the Federal Reserve’s language, but we need to have a plan that protects us from these things happening.
And then number three, with the amount of debt that we’ve accumulated up to 28 trillion now, and the unfunded liabilities, this is a lot of money. So taxes are going to go up, not just during this tax cycle, but in the future, we have to be concerned about higher taxes, inflation, it’s not imminent as far as significant inflation. Right now, what we’re seeing in the economy is what we call more transitory inflation, it should wane towards the end of 2021, but I’m talking long term inflation. What are we doing with our dollars today to make sure we’re protecting ourselves against the longer term effects of higher taxation and inflation, which are very possible outcomes of all this debt that we’ve accumulated to support the economy and also the financial system?

There’s always a link below you can click to have a conversation with one of our advisors and start down that process of making good decisions as far as optimizing the portfolio. If you liked the video, hit the thumbs up, if you didn’t like the video, you can hit the thumbs down, that’s fine with me. If you subscribe, it doesn’t cost you anything, it simply keeps you connected to us. And if you hit that little bell icon, you’ll be notified when we upload new content. So look forward to seeing you on the next video.