6/15/2020 0 Comments
Markets rally on the Fed's help
Today we saw another late day really in the markets. This came on the news that the Federal Reserve was going to buy outright corporate bonds as opposed to just ETFs. This news has some investors confused with indices nearing positive for the year and hitting all time highs in the case of the Nasdaq. This all coming while there is political unrest and signs of resurgence in COVID cases.
What is important to remember is not how things look now but what the assumptions of things to be are. The consensus is that a spike in COVID cases will occur as the country and the glob open up. These cases will be less acute and not put a strain on the healthcare system that was feared initially. The Federal Reserve is dedicated to providing liquidity until the unemployment rate looks more in line with historical norms. This combo is going to keep investors pretty happy for the time being and markets will need another catalyst to break this fragile, but fast recovery in the stock market.
Things to look for is this rally starting to become it's own worst enemy. While the Fed has taken a stance that it will not be reverting back to normalcy anytime soon, the fiscal side of things will need to continue their support as well. Liquidity will allow companies to borrow and grow with a lower cost of capital, but cheap money will not stimulate demand for customers without a job due to local lockdowns or decreased demand from a fearful public. Already we are seeing the US government sour to more stimulus when some will be needed (in the trillions). Europe is another region that started to see green shoots of unity in the debate of issuing pandemic bonds. Losing this momentum will allow the region to fragment and make the response to a deeper crisis more expensive and time consuming.
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