What Should We Do After This Big Rally?
Last week, the Dow Jones Industrial Average had its best week since 1974. For the week, the Dow gained more than 12%, and other major indexes posted double-digit gains.
The week was one of the Dow’s best in history.
After hearing the comparison to 1974, I immediately looked back at that year… and I noticed something interesting.
I thought it would be interesting to see how the index fared after the other big weeks. Seven of the 10 best weeks are shown on the next chart.
None of the best weeks were a “must buy” moment in the stock market. The cluster in 1932 and 1933 could be similar to the current time frame, since two of the 10 best weeks came in the last month.
’74 All Over Again?
I dug a little deeper into the news from 1974 and found that, on the week of the big gain, the Federal Reserve was changing policy. The Fed had been fighting inflation and a recession. The Fed Chair, Arthur Burns, called the situation “unprecedented,” a word currently being used to describe everything about the coronavirus crisis.
The chart below shows the unprecedented situation the Fed faced in 1974. Inflation was high, and the nation had only seen high inflation in wartime. This was also, as the Fed knew, a period of recession. Previous inflation had come when the economy was expanding to fight a war.
In October 1974, the Fed chair told Congress he would increase the money supply, and stocks surged.
Now let’s jump ahead to April 2020.
Last week, the central bank announced… “it would expand previously announced plans to backstop lending to large companies by supporting riskier bonds issued by corporations that had recently lost their investment-grade status.”
“Altogether, the Fed said nine lending programs it is creating or expanding would provide up to $2.3 trillion in loans, and officials signaled they were prepared to expand those programs as needed to stem long-lasting damage to the U.S. economy.”
There is a dizzying array of programs that the Fed will use to support credit markets with the ability to step into markets for short-term repos, Treasuries, corporate bonds (including junk bonds), and municipal bonds.
The Fed is doing all it can for now, and is no doubt thinking of more that it can do if the current programs don’t work.
What This Means
In my opinion, this time is no different than the other big weeks in the Dow. There is no need to rush back into the stock market because we are likely to see another decline or slow gains at best.
The reason I expect another decline is because the economic situation is similar to what we saw in the 1930s. High unemployment presents challenges. Getting people back to work will be difficult, and that means the economy could slow further than expected. It could take years to get back to full employment.
The risk to my expectation is the Federal Reserve’s willingness to print money. This money could move into the stock market, as previous rounds of quantitative easing did. I don’t expect that because corporate buybacks will be limited going forward.
I know I’ve thrown a lot at you, so let me summarize. Last week’s big gain is unlikely to mark the bottom of the stock market. Stocks will struggle along with the economy for at least the next few months. But I could be wrong because the Federal Reserve is taking unprecedented steps to print money.
I wish the news was better… and it will be soon. I am watching closely and will be back with an update next week.
In the meantime, you need to be looking for ways to earn extra income in this market. As I mentioned, we can’t afford to depend on a massive rebound in stocks. That’s why my “bonus dividend” strategy is more important than ever…
If you’d like to safely generate extra income from stocks you already own — with the least amount of risk possible — then you need to learn more about this. If you want to know more, check out this report.