U.S. Stocks Finish the Week Strong

Catch Up Quick

• U.S. tech stocks are now worth more than the entire European stock market

• Companies resume share repurchases after freezing them at the onset of the pandemic

• The Fed no longer believes in a trade off between low unemployment and inflation

• Hurricane Laura makes landfall, shuttering coronavirus testing sites in Louisiana

• The NYSE received SEC approval for a rules change involving direct listings

• NBA, NFL, MLB, and NHL players all partake in social justice related boycotts

• MGM Resorts lays off 18,000 previously furloughed employees

• 1.4M Americans applied for unemployment assistance last week

• New coronavirus infections fell by almost 15% over the past week

• Lord & Taylor will close all stores after bankruptcy filing

• Kevin Mayer resigned as CEO of TikTok

(Another Extended) Thought of the Day

• Recently, we have gotten many inquiries about the stock market, given it has been roaring upwards in the midst of multiple overlapping global crises

• Stock prices used to share a higher correlation with the broader economy than they do today

• Long ago, stockholders used to assume primary investment upside in the form of dividends

• From a corporate perceptive, dividends are a result of high earnings, which, through the financial statements, flow into excess free cash flow

• After funding core business, such as working capital items, companies use these remaining cash flows to pay out dividends to stock holders, creating a strong connection between earnings and stock prices

• More recently, in the 21st century specifically, investments bear immense growth potential, with is largely a ramification of the scalability lent by the development of both the internet and globalization

• For example, technology companies operate in a very high growth industry, and thus cash flow growth rates themselves are more relevant in determining valuations as opposed to the present values of a company's dividend stream

• In other words, these firms rarely pay out dividends to shareholders, given equity investors already have huge upside in the capital gains from its share price due to potential growth

• Therefore, the price relies more heavily on the supply and demand for its shares, which is a manifestation of investor sentiment, psychology and future expectations

The Bottom Lines

• Between a global pandemic, natural disasters, high unemployment, low corporate earnings, low economic output (i.e GDP), foreign tensions, and social injustice, among others, recent market performance may seem like an anomaly

• However, since stocks bottomed in March, market participants, many of which are new and less experienced, whether valid or not, have been persistently optimistic about the economy and stock market, creating a steady demand for shares

• In our opinion, this is the simplest explanation for how stocks have managed to swim upstream with everything going on

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