If you can’t understand why markets were flying up like a rocket while global economies crashed, you’re not the only one. It seemed like a bad joke that the Dow, S&P 500 and the FTSE were gaining back more of what they lost every day.
Part of it is historic stimulus. Central banks have been desperately buying everything from government bonds to corporate debt in a vain attempt to keep stock markets afloat. This latter situation, with the US Federal Reserve buying corporate bonds, is another first-time-in-history shocker.
In truth, modern countries are so indebted that no central bank can afford loans to actually come to term. If companies or governments ever had to pay back what they really owe, the whole system would collapse.
The Fed started its undercover stealth quantitative easing months ago, by intervening in overnight ‘repo’ or repurchase markets — where banks trade between $2 trillion and $4 trillion of debt for cash day after day. The activity on these markets keeps Wall Street running: wherever there is cash sitting around doing very little, there is a financial institution looking to get a better rate.
So, one company sells Treasury bonds, agreeing to buy them back at a higher price the next day. These short-term collateralised loans come with an interest payment due – called the repo rate.
The Fed has been dumping hundreds of billions into the overnight repo market for months. Because it’s a part of the market reserved for financial institutions, this mostly went under the radar. That meme of Jay Powell and Money Printer go BRRRRRR? It’s been running for a lot longer than you think.
News not bad enough
Investor Bill Miller, the CIO of Miller Investment Partners, wrote back in March that this bear market would be “the best buying opportunity of my life.”
He told CNBC: “I think as time goes on, unless the news on the pandemic side gets radically worse — I mean radically worse than expectations — I would expect that the fear would attenuate. Just keeping that level of emotion and fear up requires a constant dose of new and really bad news.”
Markets bounced back in from the 19 March lows, because while news was bad, it seemed it wasn’t bad enough to depress markets to retest new lows. As the number of infected and dead from Covid-19 keeps rising higher, the numbers start to blur into one another. A million infected. Okay. Two million. Sure. Four million? What’s new?
But most sensible analysts are looking at these markets — which regained nearly 20% since the recent lows, technically putting us in bull market territory — and thinking, this can’t be right.
Investors have been shrugging off epically bad news week to week. And the old ‘not as bad as expected’ routine gets played out again. As Marketwatch wrote on 8 May:
“Before the April employment report was published, premarket trading pointed to a higher opening for the U.S. stock market as the loss of jobs was a bit less than the 22.1 million forecast of economists surveyed.”
So, a roundup of economists project 22 million jobs lost in the US in April. The report comes out and the number is 20.5 million instead. Not as bad as predicted. Market goes up. Stupid.
One sole voice of reason, President Trump’s top infectious disease doctor Anthony Fauci, warned US Senators this week that states and countries that seek to open up their economies too soon face a new wave of coronavirus infections.
Any investor can get a feel or sense of where the market is heading day to day. It’s not a very scientific measurement, but trusting your gut feeling is as good as any other method.
That sentiment is starting to shift, quietly. The likes of Scott Minerd have been warning for weeks that another leg down is coming. Stocks have topped, he said. Now the issue is on the downside.
The Guggenheim Partners CIO tweeted:
Stocks have clearly topped the recent uptrend. Now we find out if this is 1930 all over again.
— Scott Minerd (@ScottMinerd) May 13, 2020
And the VIX is rising. This widely-followed index is a measure of volatility, and while the bounceback saw it heavily reduce from all-time highs of 82 on 19 March, it is creeping back up to 35 now. This is 25.4% higher than its 50 day moving average.
Recessionary news is coming thick and fast, every day. I have those words from the Bank of England ringing in my ears every time someone compares this market to 2008 or 2000. It’s the worst recession in 300 years.
I suspect that markets will trade sideways, with small dips of a couple of percent here and there, before an eventual retest of the lows.
I would think a short of the S&P 500 or FTSE 100 would serve you pretty well right now. Looking more to the medium term, investors who are not 100% in stocks at the moment and who are keeping a cash on hand back will be able to clean up, in my opinion.
Give it a couple of months, and then snap up long-term prospects from the sidelines.