If there’s one thing Wall Street hates, it’s uncertainty. And between the coronavirus pandemic and the presidential election, there was plenty of uncertainty to go around. So, it’s no surprise that many investors ran to the sidelines.
With that in mind, it should also come as no surprise that there’s never been so much cash sitting on the sidelines – nearly $5 trillion, as a matter of fact. This is significantly above the record $3.8 trillion in cash set back in January 2009 during the financial crisis!
Consumers also kept their wallets closed. Typically, Americans keep 7% to 8% of their income in savings. This year, though, that rate surged to over 33%. According to the FDIC, more than $2 trillion has been stockpiled into individual bank accounts.
That money came from selling stocks and the massive government stimulus cash that was pumped into the economy. As you may recall, the U.S. government passed a $2.2 trillion stimulus package in March. Part of that package included a $1,200 check for American taxpayers with an adjusted gross income of $75,000 or under on their 2019 tax returns.
Interestingly, folks that earned between $35,000 and $75,000 increased their investing activity in the stock market by a whopping 90%.
In addition, to keep the economy going, the Federal Reserve just about threw in the kitchen sink. Back in March, the Fed announced that it would not cap its quantitative easing program at $700 billion. The Fed also committed to purchase as many Treasuries and mortgage-backed securities “in the amounts needed” to help stabilize the U.S. economy. It would also purchase agency commercial mortgage-backed securities.
Thanks to this nearly unlimited quantitative easing, the Dow and S&P 500 will continue to yield more than the 10-year Treasury, which is hanging a little below 1%. In comparison, the Dow and S&P 500 currently yield about 2.5% and 1.9%, respectively.
And now, with a lot of the uncertainty shaken out of the market, cash is pouring in from the sidelines. And that has driven the stock market higher. The three major indices have hit record highs, with the Dow finally breaking its 30,000 milestone.
The reality is stocks tend to move higher when the money supply is high. It’s never been this high before, so there is significant upside ahead in 2021 – and significant potential for big profits.
It’s for this reason that I am sitting down with my InvestorPlace colleague Matt McCall for our Early Warning Summit on December 17, at 7 p.m. ET.
Exactly one year ago, we introduced Power Portfolio 2020 with a single goal in mind – to provide our members with a robust, diversified stock portfolio that would do well in many different economic conditions.
I am proud to say we did just that. In fact, as I mentioned yesterday, we closed the portfolio with massive gains of 35%, which blew away the Dow’s 6% return in the same timeframe.
Matt McCall and I see several factors that could lead to even bigger gains in 2021, like the cash on the sidelines that I discussed today. We’ll provide our expectations in full detail in the upcoming Early Warning Summit.