Key Points

  • The news doesn’t get better, but the market’s ability to shrug it off continues to breed questions about the perceived disconnect between Main Street and Wall Street.

  • Surging liquidity and hopeful virus treatment/vaccine news have been significant tailwinds behind stocks.

  • But heightened complacency could breed risks, with no shortage of potential negative catalysts.

The news continues to be overwhelming and devastating. Deaths from COVID-19 in the United States have moved into the six figures, 40 million Americans have filed for unemployment insurance and our country is in a state of grief and rage over racial injustice. It’s getting easier to understand the skepticism associated with the perceived disconnect between real life pains on Main Street and the resilience of (or disregard by?) Wall Street.

Is the stock market “rigged?”

That’s a refrain I hear often, and there is a kernel of truth there—perhaps best illustrated via the adage coined by my first boss and mentor—the late, great Marty Zweig—Don’t fight the Fed. The Fed’s efforts in trying to prevent the COVID-19 health and attendant economic crisis from becoming a financial system crisis are a combination of pages pulled from the 2008 financial crisis playbook, plus new chapters created for today’s unique crises. Along with relief programs initiated by Congress and the Treasury Department, the combined “stimulus” currently equates to more than 25% of real U.S. gross domestic product (GDP) this year, as estimated by the Congressional Budget Office (CBO).

As you can see in the chart below, the growth rate in M2 money supply has gone parabolic. At the same time, the velocity of money continues to sink—which is why “real economy” inflation has been kept in check. “Money printing” by the Fed (not quite an accurate description of what the Fed’s doing) only becomes inflationary if the liquidity pumped into the financial system comes out via the lending channels and picks up velocity in the economy. Without that velocity, inflation tends to be absent in the real economy—but quite evident in asset prices (like stocks).

Money Supply Goes Parabolic


Source: Charles Schwab, Bloomberg, Federal Reserve Bank of St. Louis, as of 4/30/2020. The velocity of money is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity is increasing, then more transactions are occurring between individuals in an economy.