Now & Later

There’s a new crack in the path ahead as the Treasury Department surprisingly said it plans to remove certain Fed emergency programs, including asset purchases. The Fed had asked for an extension. It raises the question as to whether the Fed will remain the Market and economic backstop it has come to be expected. There’s also the question as to why they are doing this.

We felt like this action should’ve been halted back in May, when the Stock Market first started overheating. The fact that the Fed was buying Apple and Microsoft bonds over the Summer seemed beyond excessive. An asset bubble was building. Clearly those Tech Titans were nowhere near the danger zip code, like so many small businesses across the country. The timing of doing it now seems very political as the White House has made some rash and disruptive decisions in this post-election transition period. Politics seem to have permeated every fiber of the American way of life in 2020.

Quite frankly, I’m surprised the Market did not decline more on the news. Keep in mind, the Stock Market crashed and the Credit Market nearly froze back in March, which triggered these emergency measures collaboratively made by Treasury and the Fed. The Stock Market is back near its all-time high while many Americans are still struggling with no Congressional aid in sight. There is a clear disconnect between Wall Street and Main Street. It’s been that way for a while. Right now, there are far more questions than answers to many pressing issues.

Bonds rallied this week after yields got blown out earlier in the month. Higher yields mean lower prices in Bondland. The 10-year Treasury yield kissed 1% again in November, but bounced off it again like a rubber ball on a brick wall. It’s the second time that’s happened since Spring. It closed the week around 0.8%, which is still historically low. The Bond Market is not signaling an all-clear sign just yet. That’s our go-to sign for systemic stress. For those of you looking to re-fi your mortgage, you’re getting another opportunity.

Price action has been choppy amidst the soaring coronavirus infections, which is leading to slowing economic activity. Stocks are burning off some of the overheated state from the post-election rally. The development of an effective vaccine has certainly triggered optimism for a post-pandemic world. But the logistics of distributing said vaccine are anything but certain.

The CDC warned the American people about the risks of Thanksgiving travel. Many states have already rolled back reopening plans and implemented new restrictions to curb the virus spread. The US Economy and the Coronavirus are so intertwined. Joe Biden said he will not pursue a “national shutdown – period.” But he said he is committed to shutting down the virus. California now has a curfew at 10pm starting Saturday thru December 21. Containing Covid without crushing the Economy has been a menacing task all year. The politics of Covid have more than complicated that task.

Rumors have been circulating that former Fed Chair Janet Yellen will be Biden’s choice for Treasury Secretary next week. A Yellen-Powell combo at Treasury and the Fed would likely be very supportive. The Market would like it. A sustainable 2021 recovery looks promising. That’s later. We just need to get through this rough patch in the now. The Market is wrestling with Now & Later.

Despite the volatile price action, the Market is still in a strong uptrend. A short-term pause here seems likely. There’s a great deal of complacency out there. Investor Sentiment in November reached levels last seen in January of 2018. That was before a pretty healthy shakeout. The Market is behaving very calmly despite the growing risks around it. This might not last. The Volatility Index (VIX) has been tethered to the low 20s all month now. The last time it traced around these levels was in August, before the September sell-off.

This is a seasonally strong period for the Market. Year-end rallies usually run. Next week will be a shortened week with Thanksgiving, which always brings thin trading. But another corrective set-up is in place. It could very well come in the form of time, not price.

Have a nice weekend. We’ll be back, dark and early on Monday.


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