For a bull market to gain popular support you need two big ingredients… A story that inspires people, and abundant new credit.

In 2020, the big story was recovering from the pandemic. Since then, the economy’s experienced money-printing on a never-before-seen scale. As a result, the S&P 500 is now up over 100% from its March 2020 lows.

Now, as we look at the next couple of years, the story is about global reflation, or “building back better.” Part of that solution includes improving social programs and generating more environmental awareness.

But the required funding for reflation must come from somewhere…

That’s why there’s so much media coverage about the potential for the Fed to begin tapering (or limiting the number of bonds they buy every month). If the government succeeds in pushing through its massive spending plans, they will need to issue a lot more debt, and it would help if the Fed was willing to buy those bonds.

After all, the last thing the Fed wants to do is endanger the economic recovery.

That would put significant pressure on government finances and could even endanger the recovery.

So, it’ll be very difficult for the Fed to taper in that environment. That’s why I believe there is little risk of a tapering shock. Even if the Fed announces a tapering plan later this month, they will be very slow in reducing the number of bonds they buy.

That’s a recipe for a continued bull market.

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I know many people are worried about valuations and bubbly behavior. But shouting “bubble” is not very useful. It’s only important if we think the bubble is about to pop.

That can’t happen if there is an abundant supply of new money.

This bull market won’t end until central banks are truly worried about inflation and begin to raise rates aggressively, and we are nowhere near that reality today… That means every dip in the market is perceived to be a buying opportunity.

For example, the S&P 500 has dipped in the middle of the month for the last four consecutive months. The most likely rationale is retail investors are selling their expiring options before they become worthless – and the next big batch of options expires on September 17. So, over the next 10 days we are going to see some volume migrate towards longer-dated options.

When this has happened over the last few months, the S&P 500 dropped and the VIX had a brief pop on the upside – leading traders to buy the dip. There’s every reason to believe this pattern of behavior is going to be repeated in September.

To take advantage of this opportunity, consider buying the Schwab Large-Cap Growth ETF (SCHG) on any weakness.

Apple, Microsoft, Amazon, Facebook, and Alphabet (Google) represent 43% of the fund.

These have been the biggest beneficiaries of abundant liquidity in this bull market and that’s likely to remain the case… especially since the more money the Fed decides to print, the more money will be attracted to these extraordinarily large companies.

All the best,

Eoin Treacy
Co-editor, Market Minute

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Reader Mailbag

How do you think the Feds decision will affect inflation in the future?

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