1 Chart That Shows Why Stocks Surged 40%

What a difference a few months makes.

In the blink of an eye this Spring, the stock market fell a whopping 32.3% in a matter of weeks. The reason, as we all know, was the COVID-19 pandemic. 

But what we don’t know is the reason for what happened next: An unprecedented rally that saw the S&P 500 Index surge 39.5% in just 6 weeks

Now as we learned yesterday, the answer isn’t individual investors piling in and buying stocks with their Robinhood apps.  But as the chart below shows, there are 3-Trillion reasons for the recent rally staring all of us in the face: The Federal Reserve. 

S&P 500 Chart With Federal Reserve Total Assets Highlighted on Key Dates :

Americans first got a taste of Federal Reserve Quantitative Easing during the depths of the Great Recession over a decade ago. 

The process itself is simple:

  1. The Federal Reserve creates trillions of new dollars and uses them to buy U.S. Treasury bills from the treasury and on the open market. 
  2. The increased Treasury buying leads to increased bond prices and therefore lower yields.
  3. Investors (including pension funds, hedge funds, and individuals like you and me) in search of yield pivot to the only game left in town that can get them a return: Stocks

We here at Bottom Line Investing aren’t alone in believing that the rally of the past 10 years has been helped, in part, by a very supportive Fed. 

Here’s why: At the start of 2008, the Fed’s balance sheet stood at around $900 billion. But by the end of 2009, it stood at over $2.2 Trillion. 

As icing on the cake (for investors), Fed policymakers kept on buying bonds:

U.S. Federal Reserve’s Total Assets (in millions):

As of June 10, 2020, the Federal Reserve’s Total Assets stood at an incredible $7.168 Trillion. 

That’s up a whopping $3 Trillion, or 71.4% jump, in just the past 3 months. 

The Bottom Line: We’ve never seen money printing like this before. And while there will be a price to pay (eventually), the stock market might just be the place to be with an endlessly-supportive Federal Reserve backing up asset prices. 

Thanks for reading and have a great week,

The BLI Team

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