The Fed “Goes to 11”


Chief Strategist at Interactive Brokers

One of my favorite movies is “This Is Spinal Tap”, and one of my favorite scenes occurs when Nigel Tufnel, the delightfully dim lead guitarist, explains to the “documentarian” about why his amplifiers are special.  While other blokes are playing at 10, he asks “where can they go? – nowhere”, but his amplifiers go to 11. 

For those of us who thought the Fed had already maxed out their support for markets, this morning they went “to 11”.

The list of Federal Reserve actions is quite extensive, and I’ll link to them here.  The very short version is that they are providing support, either by direct lending or market purchases of loans and fixed income instruments.  These include supporting banks’ small business loans, making outright loans to small and mid-sized businesses, lending to states and municipalities and expanding their fixed income purchasing to commercial mortgage backed securities and collateralized loan obligations (CLO).  I had worried that CLO’s could be a significantly risky area for markets as a whole, because they are a relatively new financial innovation and most new financial innovations eventually have their moment of reckoning.  I suspect that the Fed shared that fear and forestalled a significant amount of trouble.

The timing of the announcement was masterful, coming at 8:30 ET, just as another set of dreadful jobless claims numbers was announced.  It managed to make the report of over 6.6 million new jobless claims fade into the background.  Markets are far more likely to fixate on positive news from the Fed than they are to worry about a single economic report, and Chairman Powell and the Board of Governors clearly understand that.  The response was positive, and broad US indices raced up 2% shortly after they began trading. 

Today’s move puts the S&P 500 Index (SPX) right around the 2800 level that provided some support during the market’s downdraft.  Technician analysts like to remind traders that levels that provided support on the way down tend to provide resistance on the way up.  Other technicians use retracement levels to predict support and resistance levels, and a 50% retracement of the recent down move in SPX is 2792.  It is not surprising that we are seeing the market churn around those levels today.

If we hold the current levels, this would represent one of the biggest weekly market jumps in years, if not decades.  And this is only a 4 day trading week, no less. It is obvious that we overshot on the downside, largely thanks to gigantic measures by the Fed accompanied by substantial fiscal measures.  We now have to wonder if we are doing the same on the upside, given the rapidity of the bounce off the lows. 

Next week brings the beginning of a quarterly earnings season.  I can’t remember an earnings period where there was greater uncertainty surrounding both the reports and the potential forward guidance that companies may give.  It means that there is a huge potential for individual company volatility.  Normally the market has a good sense about where to expect a company’s earnings and guidance.  Now there is no consensus whatsoever.  If we were still trading at truly depressed levels, that could have been a positive – it’s relatively easy to beat the direst expectations.  Now that markets have bounced substantially, that lack of consensus is more likely to cut in either direction.

One final question is whether the Fed is done.  What they have announced over the past month or so is truly remarkable.  It seems as though they have run out of fixed income classes to stimulate.  I suspect that we would hear speculation that they could purchase equities, though it is unclear whether their mandate allows them to do that.  If the Fed intervenes in the equity markets, that could be construed as “going to 12!”

No one would ever confuse Jerome Powell with Nigel Tufnel, but he showed one similarity – the Fed Chairman went to 11 today.

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