Will The Stock Market Bounce Back? Show 68


Mallory, my wife, and I enjoy traditions. So, last year we started our apple picking tradition. We took Amelia, our daughter, up to the mountains in western NC to get apples. I enjoy apples, but Amelia loves them. She would eat two or three a day if we let her.
Last year, we arrived in the afternoon and our car ended up getting blocked in and it was a little frustrating. We were strategic this year and got there before the swarm of people arrived for the day. What that meant is we got to visit the bakery before we started picking.
I didn’t have the patience to wait in the long the bakery lines last year. My waistline probably wishes we would have been later this year, because I ate too many cinnamon covered apple cider doughnuts! It was a good thing I only bought one of the delicious cookies. We would completely make the drive again just for the baked goods.
On the way home Amelia declared it “the best day ever!” What put it over the top for her was a ride in the “cow train.” A tractor pulled cow themed cars around the orchard. If you live in the Upstate or western NC, I highly recommend making a trip to pick apples in the fall.
While September is great for apples, it is turning out to be a rough month for the stock market, and the culprit is multi-faceted. It’s easier on the mind when we can point to one thing that’s causing a disruption, but this time we’re not that fortunate.
Over in China, a large property development company called Evergrande is on the verge of default, and from my research, their overuse of leverage is a major contributor. The company agreed to the use of highly speculative development projects and in recent years ventured into business sectors outside of their expertise. Because world economies are interconnected and dependent on one another, this appears to have caused uncertainty in world financial markets.
A research company, Emerging Portfolio Fund Research, Inc., stated last week that “Almost $62 billion was pulled from cash accounts in the week of September 15th. Of that $51.2 billion went into equities, $16.1 billion into bonds and $37 million into gold.”
Much of this appears to be motivated by the expectation that the Federal Reserve will continue its easy money policies, but that’s not what the Fed is signally. The head of the Fed has said they may begin tampering or reducing the amount of bonds the government is purchasing. The bond buying program is one of the leading factors causing higher inflation.
The government has no money. What do they do? They print money or borrow money for any venture the government undertakes. Taxes are not enough to cover government spending. So, the government creates money to buy its bonds. Thus, driving down the purchasing power of our money. When there’s more of anything, it’s worth less. In stands to reason, when there is more money in circulation, it devalues current dollars. This is government induced inflation.
This has worked out to a degree for equity investors because the market has gone straight up for more than a decade. A stock market crash would be devasting for people overly exposed to equities because it will be a double hit due to inflation. If portfolios are depressed and inflation is rampant, it could majorly impact purchasing power.
October 19, 1987, became known as “Black Monday.” To this day, it’s not clear what caused the sudden stock market crash, but in the aftermath on March 18, 1988 President Reagan signed an executive order that created the “President’s Working Group on Financial Markets.” It’s also known as the “Plunge Protection Team,” and just as the colloquial name implies, when markets are plunging this group intervenes to stabilize the economy.
The power of this group is vested in four individuals. Currently those people are:
  • Janet Yellen, the Secretary of the Treasury
  • Jerome Powell, the Federal Reserve Chairman
  • Gary Gensler, the head of the Securities Exchange Commission
  • J. Christopher Giancarlo, Chairman of US Commodity Future Trading Commission
On October 6, 2008, the group made a statement that they had taken several actions to stabilize the economy. Since the Great Recession there has been much speculation on how involved the Plunge Protection Team is, and further speculation has happened by the lack of normal market cycles we’ve seen over the last decade.
I’m always happy to discuss the topics I’ve discussed here further, answer any other questions, or share how we serve our clients. You may reach me at 864.641.7955.
Until next week,
David C. Treece,
Financial Advisor

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