Craig Callahan, DBA
Founder & President
- Portfolio Manager and Chairman of the ICON Investment Committee
- Created ICON’s proprietary valuation model
- Founded ICON in 1986
Don’t Fight the Fed
Dr. Craig Callahan, ICON Advisers – Founder & President
December 14, 2020
Last spring when it became clear we would have to shut down the economy to attempt to contain the virus, the Federal Reserve shifted into gear. Within a few weeks, they had year-over-year (Y-O-Y) growth in the money supply (M1) up to 40%. The historic average is about 6% per year. The Fed injected reserves, banks made loans and M1 grew. We picked up on it and correctly told investors, as we did back in 2009, “The cavalry is on the way.” The S&P 1500 is up 67.4% off the March 23 low.
For a few years now, analysts have been stating that with interest rates so low, the Fed is helpless. We have disagreed and pointed out It isn’t interest rates, it is M1. The Fed has 3 tools to inject reserves into the banking system, which makes M1 grow; open market operations, discount window, and reserve requirements. It can use any of those successfully even in a low interest rate setting.
Over the last two weeks, I have seen one of the most amazing things I have seen in all my years of watching the financial markets. Two weeks ago M1 grew 8.7% in one week, making it up 56.8% over 52 weeks. Then this week it grew another 5% to be up 64.7% over 52 weeks. I can only guess that the Fed saw Congress stalled on a fiscal stimulus, so they juiced M1.
As for stocks, ICON’s valuation readings combined with the rapid growth in the money supply make us believe the market will move higher over the next year.
Rule 1, Don’t fight the Fed.
Rule 2, Go back to rule #1.
Rule 3, There is no rule #3.
The data quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the data quoted. Please call 1-800-828-4881 or visit www.InvestwithICON.com for performance results current to the most recent month-end. Results are net of fees and calculated in U.S. dollars.
Opinions and forecasts regarding industries, companies and/or themes and portfolio composition and holdings are all subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security, industry or sector.
Investing in securities involves risks. There is no assurance that the investment process will consistently lead to successful results.
ICON’s value-based investing model is an analytical, quantitative approach to investing that employs various factors, including projected earnings growth estimates and bond yields, in an effort to determine whether securities are over- or underpriced relative to ICON’s estimates of their intrinsic value. ICON’s value approach involves forward-looking statements and assumptions based on judgments and projections that are neither predictive nor guarantees of future results. Value readings are contingent on several variables including, without limitation, earnings, growth estimates, interest rates and overall market conditions. Although valuation readings serve as guidelines for our investment decisions, we retain the discretion to buy and sell securities that fall beyond these guidelines as needed. Value investing involves risks and uncertainties and does not guarantee better performance or lower costs than other investment methodologies.
ICON’s value-to-price ratio is a ratio of the intrinsic value, as calculated using ICON’s proprietary valuation methodology, of a broad range of domestic and international securities within ICON’s system as compared to the current market price of those securities. According to our methodology, a V/P reading of 1.00 indicates stocks are priced at intrinsic value. We believe stocks with a V/P reading below 1.00 are overvalued while stocks with a V/P reading above 1.00 are undervalued. For example, we interpret a V/P reading of 1.15 to mean that for every $1.00 of market value, there is $1.15 of intrinsic value which has not yet been realized in the market price.
The unmanaged Standard & Poor’s Composite 1500 (S&P 1500) Index is a broad-based capitalization-weighted index comprising 1,500 stocks of Large-cap, Mid-cap, and Small-cap U.S. companies. Total return figures for the unmanaged sector indexes do include the reinvestment of dividends and capital gain distributions but do not reflect deductions for commissions, management fees, and expenses.
M1 is one measure of the money supply that includes all coins, currency held by the public, traveler’s checks, checking account balances, NOW accounts, automatic transfer service accounts, and balances in credit unions. Gross Domestic Product (GDP) is the total value of goods and services produced in the national economy in a given year. It is the primary indicator of economic growth. A Treasury bill (T-Bill) is a short-term debt obligation backed by the Treasury Dept. of the U.S. government with a maturity of less than one year.
Please visit ICON online at InvestWithICON.com or call 1-800-828-4881 for the most recent copy of ICON’s Form ADV, Part 2.
