It is no secret that the Nasdaq has defied all headwinds and posted phenomenal returns amidst an environment that has been nothing but gloomy – record unemployment, massive GDP hole, coronavirus cases and deaths mounting by the day and no vaccine in sight. To put it in perspective, year to date, the S&P is up 1.2%, Dow Jones is down 7.4% but the Nasdaq is up 19.8%. Looking at the Nasdaq returns, one would assume we are in a period of phenomenal growth with all the factories humming and the economy is in full swing. But, of course, that is not the case.
The fact is that the Fed has all but assured the markets that it has its back. In the Fed meeting this week, they left interest rates unchanged and made a pointed remark that they will use all the tools to support the economy through the virus crisis. This echoes what investors have been hearing all year, giving another reason to rush and buy the darlings of Wall Street – the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google).
Surprise! All of them are listed on the Nasdaq and are instrumental in driving the index higher.
Future Wealth’s View
At times like these, it is important to look beyond the headlines. The Fed cannot fix the US economic woes by itself. Yes, it can keep interest rates low and keep supporting the bond market to the point where even corporate bonds and junk bonds are secured by the Fed. But, ultimately, it is the consumers who have to take over and support the economy. US GDP dropped by 32.9% in Q2 2020, a precipitous drop from a 5% decline in Q1 2020. The paramount reason was that US consumers, who traditionally have been terrible with savings, started to put away their stimulus checks in the bank, instead of spending it. So much was the savings that the personal savings rate in Q2 2020 spiked to 25.7% from ~9% in Q1 2020 and, way above the historical average of ~7%.
One wonders if investors are feeling wealthy from their investments in the Nasdaq, why are they not buying more and why is consumer spending hampered? The answer, of course, is that the average American family is not one of the few beneficiaries of the extraordinary returns of the Nasdaq. It is a well known fact that the top 1% of Americans own almost as much wealth as the middle class. When interest rates are close to zero, it forces people to make a binary choice: invest in the stock market, which has more risks, to earn returns on their money or go the safe route and park their funds in a bank account yielding under 1%. The people who elect to invest in the stock market are handsomely rewarded. Those who either did not possess enough money to invest in stocks, bonds and real estate or elect to stash their money in bank accounts instead, barely keep pace with inflation.
No points for guessing correctly which demographic invests in the stock market. Such is life.