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In case you haven’t heard (you likely have), don’t fight the Fed.
Investors are absolutely eating up that common stock-market refrain these days, and who can blame them? After all, the central bank is armed with ample firepower, and it’s pumping a seemingly endless flow of liquidity into markets. Hence, sky’s the limit—for now.
“What the Fed has basically said is: ‘Our goal is to make sure we have orderly and liquid markets.’ The market has taken that to mean, ‘Okay, we’re going to buy like there’s no tomorrow’” Wells Fargo Investment’s Sameer Samana recently told Bloomberg News. “If the market’s able to trade efficiently, the Fed is starting to see their job as mission accomplished.”
President Trump is on a mission of his own, as he cheered Monday’s new high.
Bill Blain, strategist at London-based Shard Capital, wrote in a blog post on Monday that the Fed’s actions mean “massive consequences” are coming. But when? That is the question.
“Listen politely to what analysts and city-writers are saying about ‘over-bought markets’ and ‘financial resets’… and follow what the central banks actually do,” he said. “It’s going to remain about desperate distortion as central banks keep playing whatever cards are left to stay in the game. While this crisis lasts, playing markets is all about playing that distortion.”
Meanwhile, Blain said investors will have to gauge “current euphoric valuations versus the frankly miserable outlook,” with a dose of the latter likely coming in the form of Friday’s jobs report.
Read:Manufacturers expand again, but execs say not all the jobs are coming back
“We’ll keep trying to guess how the global economy is changing and where the threats and opportunities lie, all-the-while working out what central banks will do next and wondering how to arbitrage their actions,” he explained in his post.
“ ‘When it all goes inevitably wrong—because it will—then QE X-Power 3.1 will see markets bailed out again… and again.’ ”
Then there’s the coronavirus, which continues to blow up models and forecasts.
“For every economic release that seems to suggest underlying global economic resilience, it feels like there will be an ‘equal and opposite’ force in the form of renewed social distancing, travel restrictions or even lockdowns as second waves or hot-spots threaten,” he wrote. “Renewed restrictions feel likely to strangle any real recovery.”
Which brings us back to the Fed and Blain’s overarching message: Ignore the headlines saying markets can’t keep defying gravity, because they can. And will. Until they don’t.
“The reality of the last five months, since March, is that you can’t fight global central banks. QE Infinity version 2.1 distorts markets even more dramatically than the original QE 1.1 – which simply distorted markets by keeping rates artificially low,” he said. “When it all goes inevitably wrong—because it will—then QE X-Power 3.1 will see markets bailed out again… and again.”
But, at some point, he warned, “the dam will burst” as governments continue to interfere.
“We all know that replacing the invisible hand of markets with the dead hand of state control is one route to disaster,” he said, adding that the rise of “bureaucratic mindset” will further distort.
And yet the market keeps pushing higher. At last check, the Dow Jones Industrial Average DJIA, +0.84% was up triple-digits, while both the S&P 500 SPX, +0.75% and tech-heavy Nasdaq Composite COMP, +1.41% were also logging gains in Monday’s session.
