The S&P 500 stock index hit a new closing high on Friday of 3,508.01. The NASDAQ also closed at a new historic high of 11,695.63.

The S&P index has reached new historic highs the last six days and hit new highs seven of the last nine.

The NASDAQ index has reached new historic highs six of the past seven days and hit new highs in eight of the last ten days.

The stock market seems to be really rolling.

The Latest Push

Two explanations are given for the strong ending to the week: first, consumer spending rose modestly in the month of July; and second, the Federal Reserve announced a new policy shift, one that has been interpreted as meaning that the Fed will keep the banking system and the financial markets well supplied with liquidity for a longer time than previously expected.

Consumer spending in July increased at an annualized 1.9 percent from June. This is not a very strong performance and was below the increases achieved in May and June, but in this pandemic driven world we live in, this has been taken as relatively good news.

Investors took the news from the Federal Reserve in a very positive way. As usual, investors are looking for any way to justify their trust in the Federal Reserve and to the belief that the Fed will continue to underwrite more and more historical highs in the stock market.

The Rise In The Stock Market Is Vital

It is very apparent that the performance of the stock market is crucial to President Trump and will get a lot of attention in the next two months.

If the stock market continues to rise over the next two months, the stock market will be “front and center” in all political discussions. A strong stock market will be taken as a judge of the longer-term state of the economy. That is, a good stock market implies that business is on the mend and is expected to be getting stronger for the future.

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This puts the Federal Reserve under a lot of pressure. But, this is always the case as the country nears a presidential election. Federal Reserve officials do not want to make a mistake that might cause a correction in the stock market right before the voting takes place. The Fed does not want to impact the electoral results or look like it is trying to impact the election.

This situation puts added pressure on Fed Chair Jerome Powell and his fellow members of the Federal Open Market Committee, the unit that determines what monetary policy will be.

A Fed move that results in a market correction will draw a lot of criticism, even if the outcome is unintended.

Usually when a presidential election is taking place, the Federal Reserve acts to keep markets as calm as possible, with as little volatility as can be maintained. The Fed does not want to be accused of anything political.

There May Be Further Disturbing Economic Data

Of course, we are not out of the woods yet in terms of what might happen in the economy.

Just to look at the consumer spending issue. There is great concern about retail spending going forward, as the $600 weekly federal supplement to unemployment benefits for workers laid off during the coronavirus pandemic lapsed. This has not been replaced and there is concern in Washington, D.C. that Congress will not be able to produce an adequate replacement.

Fiscal disconnect is a fact of life right now.

In addition, the Conference Board has indicated that its consumer confidence index dropped sharply in August to 84.8 from 91.7 in July. There is also concern that due to the economic outlook and the financial condition of consumers that consumer spending may face further weaknesses in the upcoming months.

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Furthermore, as I have been writing, there is great concern over the debt buildup in the United States, both public debt and private debt. Coming into the current recession, a lot of companies were on the edge of bankruptcy and many have already bitten the bullet and have gone over the edge.

The massive flooding of the banking system with liquidity has given some companies more time to get themselves in order, but the economy still faces the possibility that there we be a real insolvency crisis where many more companies, especially smaller ones that do not get much attention, will “go under.”

This could provide a real jolt to the economy.

The Next Two Months

A lot is going to be going on over the next two months or more. And, so much of what might happen takes on the role of unknown unknowns. Given the election, given the recession, given the presence of the pandemic, and given the uncertain condition in much of the rest of the world, it is almost impossible to discern what might ultimately happen.

Something not mentioned in this article yet is the possibility for a rise in inflation. We read, “Wall Street is Looking for Inflation in All the Wrong Places.” Woops, here is another possibility. With all the Fed’s largesse, inflation could be lurking just around the corner.

I don’t believe that consumer price inflation will be a near-term problem, but try and convince some investors in the market for gold that inflation is not a possible issue.

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Investors are going to have to realize that the next two to three months is going to be a whirlwind of things going on and they are just going to have to stay steady and hold on. My feeling is that we are going to feel pulled one way and then another way, with very little we can take away concerning the future of the economy and the future of the financial markets.

Like I implied above, I don’t think that this will be a real comfortable time for Federal Reserve officials.

But, keep an eye on what the stock market is doing. The president, I believe, needs a strong stock market to have any chance of being re-elected. Historically, this is true, just ask Jimmy Carter and George Herbert Walker Bush, the only one term presidents since Harry Truman.

So, what happens in the stock market is going to get a lot of press. But, continue to watch whether or not the investment community retains its trust in the Federal Reserve to support the stock market.

This, I think, is the background for the events of the rest of the year.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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