A well-reasoned, fundamental-based investment process incorporates company-specific analysis combined with industry trends and macro-economic drivers. This approach helps identify valuation “dislocations” which may be leveraged to the upside or downside.
However, fundamentals have never mattered less. Investors’ collective attention is glued to Washington with one eye squarely focused on the Fed and the other on the Fiscal side of the ledger. Who can blame them? We estimate that the equity market would trade at least 50% lower ex-stimulus and if interest rates were allowed to find a natural equilibrium.
Never before have the capital markets felt such heavy hands as those administered by the Federal Reserve and Congress/Treasury since April 2020. Fiscal and monetary policy are having their moment on center stage. “Will the fiscal side get a deal done before Congress breaks?” “Will the Fed hold interest rates?” “Will the Fed extend its various emergency lending facilities?” The Fed answered the latter two questions in the affirmative and our answer to the first question is “most likely.”
Chairman Powell made it clear at his press conference Wednesday afternoon that the Federal Reserve stands ready to deploy additional stimulus to support a COVID weakened economy. Negative nominal interest rates are not likely in our view while real interest rates are already there. When the Federal Reserve ultimately decides to raise nominal interest rates (2022?) we believe it is likely that the Fed will support equity markets by printing money to purchase equity ETF positions.