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Weekly Report – Could Stocks Really Continue Moving Higher?

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Could Stocks Really Continue Moving Higher?
American Rescue Plan Act Relief Bill

As you may recall, coming into the year, we called for risk assets to move higher on the back of COVID-related stimulus and central bank policy decisions. We felt that this would ease financial conditions further and set the stage for a robust economic recovery during 2021. It now appears that our thinking was correct in that stimulus measures would continue to make their way through the system and propel markets higher.

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Now this week, we had another $1.9 trillion stimulus bill passed that will make its way through the system. The bill includes additional stimulus payments to individuals, enhanced employment aid, rental assistance, an extension on the eviction moratorium, temporary tax credits and subsidies for health coverage. As we might expect, this new stimulus should only improve the broad-based strength we already see in U.S. equity markets. In fact, just after its passage, we are now on the doorstep of yet another record high for the S&P 500. At the same time, we see improving market breadth, as an increasing percentage of New York Stock Exchange listed companies are trading at 52-week highs. Of course, this view must be tempered by the fact that a year ago, we were trading near the pandemic lows, and the outlook was considerably more pessimistic. What this shows us, however, is the difference a year makes and just how powerful the federal response to the pandemic has been.

To illustrate the point, all we must do is look at the Fed purchase of Treasuries dating back to June 2020. And what is more is that the treasury purchases only appear to be gaining momentum, with the last four weeks showing a steep increase of buying to the tune of more than $95B.

It is no wonder why the Federal Reserve is now the biggest buyer of Treasuries for the second year in a row.

To us, the recent four weeks of bond purchases by the Federal Reserve look like a form of yield curve control as more than 90% of the treasury purchases over this time frame were targeted at longer duration bonds. In other words, it looks like the Federal Reserve is trying to thread a needle and keep a steepening yield curve somewhat under control.

For now, it appears only to be having marginal success as investors continue to worry about inflation and subsequent impacts on interest rates, and more importantly, the speed at which the Fed might be compelled to hike rates to contain potential inflationary forces.

Nonetheless, investors appear to understand that the current yield environment and the prospect of at least a near-term bump in inflation only increase the need to buy risk assets. After all, as the chart below shows, the real yield on globally balanced portfolios is currently below zero.  

It is no wonder that the Goldman Risk Appetite Index is reaching levels seen just ahead of the dot-com bubble implosion and just ahead of the Great Financial Crisis.

While those two episodes ended poorly, we are certainly not saying that a replay is imminent. In fact, we still believe stimulus measures and a robust economic rebound can keep the appetite for risk assets strong. A recent survey taken by Bank of America shows that a high percentage of those in the accumulation phase (aged 25-54) will use a substantial portion of their stimulus checks to buy stocks. And, in our view, it helps make the case that market performance could continue to surprise to the upside despite extended valuations, at least for a little while longer.

Weekly Global Asset Class Performance

American Rescue Plan Act Relief Bill

Written by Scott Bishop, MBA, CPA/PFS, CFP® and Rolando Garcia, JD, CPA
Friday, March 12th, 2021

Congress approved another coronavirus relief bill on March 10, 2021, the American Rescue Plan Act of 2021. The passing of the $1.9 trillion bill comes on the heels of a long and close vote in the Senate last week. The new bill, expected to be signed into law by President Biden on March 12, includes provisions for stimulus payments, extended employment benefits, additional small business funding, and much more.

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Disclaimer:

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC), or any non-investment related content, referred to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA Wealth Management, LLC. Please remember to contact STA Wealth Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives to review/evaluating/revising our previous recommendations and/or services. STA Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the STA Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.

Financial Planning and Investment Advice offered through STA Wealth Management (STA), a registered investment advisor. STA does not provide tax or legal advice and the information presented here is not specific to any individual’s circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer to avoid penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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