23.04.2020 – Special Report. Unemployment in the USA continues to rise unstoppably. Sales of new homes in the USA are collapsing as never before in a March. In Europe, the PMI plummets dramatically. An end to the Corona crisis is not in sight. And yet stock market prices remain surprisingly robust. Above all, faith in the Fed is providing support. And the increased investment in the top five stocks in the US. This tight market fixation may yet come to a bad end.
Ten years of recovery wiped out
It can happen that fast: The corona crisis destroyed more jobs in the USA within a few weeks than were created in around ten years of the boom. Only last week, 4.427 million Americans made an initial application for unemployment benefits, according to the Ministry of Labor. This puts the number of applications from the past five weeks at 26 million. After the financial crisis, around 22 million jobs had been created since autumn 2010. The Federal Reserve added in the Beige Book that economic activity had slumped “sharply and abruptly in all regions”. And yet stock prices are holding up surprisingly well.
Soviet economy instead of market
The most important factor for this: The Fed is pumping $2.3 trillion into the market. Through bonds, banks and the general promise not to allow increased volatility, it is supporting the market. This is the situation all over the world: Japan just announced unlimited quantitative easing and the European Central Bank announced that it will also buy corporate bonds from “Fallen Angels”. So government support everywhere. The blog “Global Macro Monitor” commented for the US that the Fed has effectively nationalized the financial markets. Kremlinologists on Wall Street are trying to find out in advance what the Politburo will buy.
BlackRock follows the Fed
In fact, asset manager BlackRock, which manages around $7 trillion, recently announced that it would do everything the Fed does. Specifically, Rick Rieder, head of the Global Allocation Team, wrote „will follow the Fed and other DM (Developed Markets – die Redaktion) central banks by purchasing what they’re purchasing, and assets that rhyme with those.” BlackRock wants also „pick away at some sectors of the equity market that have had valuations destroyed beyond even worst-case scenarios such as healthcare, biotech, technology, defense, home builders, and others.” In the long term, BlackRock will reduce its cash position and will „rotate down the credit spectrum, swapping investment-grade credit for higher quality high-yield or loans”, which the Fed is also buying.
Even the Fed could fail
Rabobank recently commented similarly, the Fed “carved central planning into the bedrock of the US financial system”. Its purchases are a part of the investment process, or what is left of it, that is priced in all over the market. With the $2.3 trillion liquidity program adopted at Easter, the Fed is supporting banks, small businesses, states, cities and municipalities, buying ETFs (Exchange Traded Funds – index funds) that contain junk bonds. Unfortunately, even this money will not be enough if a second wave of corona strikes in the USA. Not to mention the rather small economic support in Europe or China. This would give us the first doubts about the Fed’s omnipotence.
„In Fed we trust“
“In Fed We Trust is all the buyers have,” Jeffrey Edward Gundlach, American star investor and founder of DoubleLine Capital, recently twittered accordingly. Already at the beginning of April he warned of a newly emerging panic later this month. Gundlach expects the total volume of US economic stimulus packages and monetary policy support measures to reach USD 10 trillion. The unemployment rate in the USA will rise to 10 percent, and the US dollar will lose value with the escalating national debt behind it, he said in a webcast according to “InstitutionalMoney.com”.
Supported by the Top 5
In fact, the current upswing on the stock market is built on a thin foundation. The already mentioned “Global Macro Monitor” sent out a corresponding warning: At the close of trading last Friday, the Big Five – Microsoft, Amazon, Google, Apple, Facebook – together accounted for around 18 percent of market capitalization, measured by the Wilshire 5000. See the chart below. Many investors were still holding out across the board, waiting for the shorts to capitulate.
Shorties get into position
Then the blog quoted an article in the “Wall Street Journal”: The short bets against the SPDR S&P 500 Trust, which is the largest index fund that tracks the broad market, would have reached 68.1 billion dollars last week, the highest level since January 2016, as the financial analysts of S3 Partners had calculated. By the way, at the beginning of 2020, the total was 41.7 billion. Again, many investors do not believe that the Fed can or will fix everything.
Our conclusion from all this is that if the investors invested in the top 5 cash in after the interim recovery, things look bad for the market. Moreover, if the corona crisis picks up speed again after a relaxation of the quarantine in the West, or if new outbreaks break out in China, then we would have another push factor. And when doubts about the Fed’s omnipotence or its speed of reaction spread like wildfire across the trading floor, then we would see the next bear market. Especially since the S&P 500 has just reached its 50-day line, which could act as a resistance.
But if, on the other hand, the euphoria overflows, for example because an effective corona drug is discovered, then all the doubts expressed here are waste paper. Then we will experience a nice short squeeze. And a new market breadth on the way to the top.
The Bernstein Bank wishes successful trades!
Important Notes on This Publication:
The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.