Talking Points – January 2021

January 20, 2021 – Liquidity

There are many factors that effect financial markets in both the short and long-term. It could easily be argued, tops on the list is liquidity. The amount of cheap money flowing through the system right now is astounding.

Our first chart looks at the huge spike higher in M2, which is the total amount of cash and cash like instruments.

Source: Strategas Research

Next, we see the level of assets held by the Fed’s balance sheet. This is from last month and has certainly climbed higher since.

There are many concerns investors have from this type of liquidity, perhaps most notably inflation. It should not be forgotten these same fears have existed since the Great Financial Crisis more than 10 years ago and have yet to occur. That is not to say they never will, but as evidence of the difficulty in predicting the outcome from such an unprecedented period, let alone the timing of such predictions.

The rise and fall of liquidity measures and the resulting effects will be one of the most important financial factors to monitor in the years ahead.

January 6, 2021 – A Less Discussed Reason Stocks Have Increased So Much

There are many reasons that can be given for the enormous stock market rally over the past couple of years. The actions of the Central Banks and low interest rates, in general, would rank high on that list. In a related reason, we look today at a simply amazing chart. The amount of negative yielding debt has reached a new all-time high at nearly $18 trillion.

Source: Strategas Research

When your choices for bonds in many parts of the world provide a negative yield, it is not hard to see why many investors have shifted some of their typically more conservative money to equities. Whether they are taking more risk than they should is a whole other conversation, but the limited attractiveness in most bonds has been one of many factors why stocks have had such success in recent years.

Source: Greg Towner, CFA, CMT