Goldilocks Rescues Wall Street

So far this year, we’re enjoying a Goldilocks phase of not-too-hot, not-too-cold economic growth. It’s the sort of balance that will continue to drive stocks higher in the coming months.

A major tailwind for equities of all sizes this year will be low interest rates. The Federal Reserve has indicated that it will keep rates low into the foreseeable future. This monetary policy is unlikely to change in 2021, even as growth recovers, because there’s still sufficient slack in the economy and jobs market to warrant central bank support.

These underlying positives have propelled stocks to record highs so far this year. That said, the major indices took a breather on Thursday. The Dow Jones Industrial Average fell 68.95 points (-0.22.%), the S&P 500 declined 14.30 points (-0.38%), and the tech-heavy NASDAQ slipped 16.36 points (-0.12%).

In pre-market futures trading Friday, stocks were trending lower. President-elect Joe Biden on Thursday night introduced a $1.9 trillion pandemic relief package and investors are taking a wait-and-see approach.

What about the tumultuous denouement of the Trump regime? Despite the impeachment drama, investors are looking past Donald Trump, who will soon have no power. In my youth, when I worked on a daily newspaper, my managing editor had a term that seems apropos to describe the outgoing Trump team: “fish wrap.” In other words, yesterday’s news.

Yes, the Capitol Hill riots last week were horrific, but they haven’t altered the fact that in a few days we’re getting a new president. Wall Street already is contemplating Joe Biden’s policies and his promises of huge fiscal stimulus.

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Investors also are relieved that under Biden, the destructive Sino-American trade war will come to an end. Biden and his team are free traders. To be sure, China continues to pose a threat to American interests, but incoming White House policymakers have vowed to use negotiation and political pressure rather than the blunt (and ineffective) weapon of tariffs.

In the meantime, we’re benefiting from the Fed’s ultra-dovish stance. Federal Reserve Chair Jerome Powell asserted Thursday that the Fed would continue shoring up the economy with bond buying.

During the coronavirus-induced economic downturn, the Fed has responded with unprecedented levels of monetary stimulus. The Fed has slashed interest rates to near zero and pledged to buy bonds in nearly all segments of the credit market, including government and mortgage securities and corporate and municipal bonds.

The Fed’s balance sheet currently hovers at $7 trillion. Consequently, we’re witnessing record growth in M2 money supply.

Beginning in March 2020, during the nadir of the pandemic’s damage to the economy and financial markets, M2 has shown double-digit year-over-year growth, peaking in November at 25.1% (see chart).

Typically, this ballooning of money supply would generate higher inflation, but that hasn’t been the case. The above chart explains why.

The crucial distinction here is the velocity of money, i.e. how frequently money changes hands in the economy. January 7 data from the Federal Reserve show that while M2 money supply growth is at record highs, M2 money velocity is at all-time lows. That’s because, during these still-perilous economic times, businesses and consumers are saving a lot of money.

The Fed reports that savings deposits are up about 20% compared to last year at this time. The result: economic growth without inflation (for now, anyway). Inflation, of course, eats into investment gains and erodes purchasing power.

A Goldilocks economy features steady economic growth, preventing a recession, but not so much growth that inflation climbs too much. We’re enjoying economic acceleration, but the pandemic is tapping the brakes.

When the virus is fully contained, we may start to see worrisome inklings of inflation, as businesses and consumers dip into their sidelined cash. But as disappointing jobs data revealed this week, we have a ways to go before we start worrying about inflation.

Putting velocity to work…

The topic of velocity brings me to my colleague, Jim Fink.

As chief investment strategist of Velocity Trader, Jim has devised a scientific trading method that consistently outperforms, in markets that are going up, down or sideways. He calls his method the Velocity Profit Multiplier (VPM). In a new presentation, he explains how the VPM can help you turn $5,000 into $255,000 in the next 12 months.

Jim Fink has used his proprietary VPM to personally amass a $5 million fortune. Want to learn how Jim turns velocity into money? Click here.

John Persinos is the editorial director of Investing Daily. You can reach John at: mailbag@investingdaily.com. To subscribe to his video channel, follow this link.