It feels like there is a massive tug-of-war going on. And the tug-of-war is taking place on a tightrope. It is clearly centered around the subject of Covid 19 and a return to normalcy. It’s pitting powerful forces in some ways against each other. It’s the Economy vs Human Health. It’s showing up with Politicians vs Medical Professionals. Feeling vs Science. It’s States vs States. It’s also Bulls vs Bears, Stocks vs Bonds and Optimists vs Pessimists. Even the Media in some circles seem to have taken sides. It makes it very confusing for the American people. There is pretty much something for everyone. It is clearly not a game. The tightrope act of killing the health crisis without killing the US Economy is essential for success. It requires a very delicate balance. The Fed is playing the role of safety net below, providing critical support as we cross the pandemic rope. The Market is like a scoreboard.
Whatever it takes is more than an attitude. The Fed has taken decisive action. Minutes after it was reported that another 6 Million jobs were lost, making it nearly 17 Million in just three weeks, the Fed swooped in again. The Federal Reserve announced a flood of new actions, providing another $2.3 Trillion in loans. The big piece is a much-discussed Main Street Lending Program, which will provide $600 Billion in 4-year loans to small and mid-sized businesses. These are getting to be just unthinkable amounts of money being spent to cushion the coronavirus blow. The Fed expanded its bond buying beyond investment grade Corporates into Municipals and now even High Yield, which means Junk.
The Fed is buying pretty much every asset class but stocks. They just might do that too. The Fed keeps going into places they’ve never before been to provide support. This is the largest monetary policy experiment in the history of economics, far larger than the Financial Crisis interventions a decade ago. Congress is acting too. Whatever it takes.
Here’s the thing: The government can’t magically make the US Economy return to normal. It can’t control the behavior of the American people. It can definitely influence it though. What’s missing is a clear action plan for recovery. There is no tangible national plan to reopen America. Even though a possible date is premature, establishing guidelines and a strategy is essential. This has forced state and local governments to act on their own. As of this writing, there are eight states that still have not ordered a shelter-in-place to its citizens. These are clearly uncharted waters. With no proven medical treatment or vaccine in place, a return to crowds seems highly unlikely. Fed Chair Powell said this morning that rushing to open the US Economy would be problematic. We don’t need a false start.
We continue to follow the data and trust the science. When Dr. Anthony Fauci speaks, we stop and listen. Dr. Fauci said the government is looking for ways to ease back to normal. There continued to be more optimistic tones at the coronavirus briefings even after New York City reported its deadliest day yet. White House officials said they see “real evidence” that lockdowns and stay-at-home efforts are working in states like California and Washington to slow the pandemic. The rate of new cases seem to be slowing and the curve is bending. Dr. Fauci said in an interview that it looks more like 60,000 projected fatalities, rather than the 100,000 to 200,000 initially projected. Fauci sees the US making progress toward normalization in the near future. He did not indicate that he supports an opening of the country in May. It seems far more likely that the lockdowns will continue into Summer. Bay Area schools announced this week that they will not resume in-person instruction for the remainder of the school year. Fauci cautioned that the virus has different progression rates in various parts of the US that may necessitate a range of timetables. We need to continue to “sit tight” and let the process take its course.
So if the Market is the scoreboard in all of this, what’s it showing? It’s knotted in a tug-of-war of its own. There was a crash down in just five weeks, followed by a crash up in under three. A 35% decline led to a 25% increase. The S&P closed the books on its best week in five decades. The Market seems to have priced out the worst-case scenario now. It actually seems to be pricing in some rather good things ahead too. That seems a little premature. There are 17 Million Americans newly out of work. Recovery is going to be a process. The Bears won the first round of the tug-of-war in decisive fashion. The Bulls just took round two.
2750 on the S&P (which translates to 23,400 on the Dow) is the breakeven point we measure in this Market tug-of-war. After an impressive three-week rebound from the panic lows, the Bull is showing signs of fatigue. Leadership is changing. Tech has lost some momentum. Volume keeps shrinking within this rally. Volume swelled during the crash in March as panic set in. Volume is almost always higher on the way down than up, but we’d like to see some convincing buying power at play. We just aren’t seeing it.
The other thing that gives us pause: Why did the Fed feel the need to do this today? The large jobless claim was already expected and the Stock Market has already responded quite favorably to the Monetary and Fiscal response. The Credit Markets have been functioning well. Do they know something? Are things much worse than we already think? They just pulled that safety net much wider. The answer will only be known after the fact. This increases our conviction in adding to our defensive positioning this week. We bought the lows. We have been trimming the highs, holding Bonds and Gold, and increasing our hedges. This is our internal safety net for your life savings.
The Market will be closed tomorrow, in observance of Good Friday. We will be closed too. We’ll be back, dark and early on Monday.
Happy Passover and Happy Easter!