Get Ready for the Fed vs. Coronavirus: Round 2
The Fed is in unanimous agreement... Zero percent rates for years... The worst day for U.S. stocks since March... Get ready for the Fed vs. Coronavirus: Round 2... Make trades no matter what happens... Two percent of small American businesses have closed for good...
This 'Fed speak' matters...
Before the pandemic era, most casual market observers rarely paid close attention to what the Federal Reserve projected it would do next year, much less the next two or three.
But the "dot plots" have always been there...
These are the publicly available graphs, released after every regular Fed meeting, that signal the interest rate projections for the next few years by the 17 members of the central bank's decision-making board...
It's easy to forget that more than two dozen actual humans are behind the controls of the monolithic central bank... and that they bring their own perspectives to the table... but a look at these dot plots usually serves as a reminder of the human nature involved.
The projections for the benchmark federal-funds rate usually vary by a percentage point or two – a big deal in the world of big moneylending to corporations and the various interest rates in the U.S... and also a sign of differing opinions.
That was not the case with the one we saw yesterday... All 17 dots were lined up in a row next to each other at the 0% level – through the year 2022. It was unanimous. A rock-bottom fed-funds rate for at least the next two and a half years...
This doesn't exactly strike a tone of positivity for the U.S. and world economy. But it also seems to mean "easy money" forever... or at least until COVID-19 fears are gone, as we noted in the May 18 Digest. Powell said back then...
What we're really looking at is getting the medical data, which is not what we usually look at, taken care of so that the economic data can start to recover.
At the least, even if things don't play out exactly as projected (and with the way 2020 is going, that's a good bet) the central bank's most recent comments yesterday signaled to U.S. businesses that it will do whatever it takes to prop up the economy... to keep money cheap... and to keep hope alive... for the next couple of years.
In a typical "Fed speak" statement, the bank said it "expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals."
Powell put it more plainly in a press conference...
We're not thinking about raising rates. We're not even thinking about thinking about raising rates.
That's nothing new. And neither is this 'zero percent, easy money' story...
The fed-funds rate was between 0% and 0.25% for seven straight years not that long ago, beginning during the financial crisis in December 2008 and stretching all the way to December 2015.
We've been right back there again since the Fed's emergency rate cut in March.
So, cheap money for all in the short term (assuming you're still in business), along with low yields... and still more debt to deal with in the long term via the Fed's ever-expanding balance sheet and on down the line, children and grandchildren be damned.
The market has taken the 'juice' well...
The major U.S. indexes rallied more than 40% off their March lows... And that was before so-called "safe" money has just recently started to come off the sidelines and back into the market.
Whether it's entirely Fed-induced or primarily from folks susceptible to the fear of missing out ("FOMO") can be debated, the numbers that Stansberry NewsWire editor C. Scott Garliss shared with us yesterday don't lie...
In short, funds from investors that had been sitting in low-risk, low-return money market accounts have been coming out lately, after being parked there in giant amounts during March's panic.
About $1.2 trillion went into money market accounts since the start of the crisis. That spike is just starting to roll over, and most of the money has been going into U.S. bond funds so far. That's a bullish signal for stocks, according to Scott...
Roughly $36 billion has started to come out of those cash funds. It has been going into investment-grade corporate bond funds and high-yield corporate debt. It's going to come back into the stock market as well, if it hasn't already.
When it does, Scott said it will further fuel a rally higher, as it did at the start of the last bull market run.
Scott wrote in the NewsWire yesterday that on March 13, 2009, money began to flow out of money market mutual funds after the financial crisis. The benchmark S&P 500 Index returned a total of 461% from then until February 19, 2020.
At the same time, just today, the major U.S. indexes took their biggest one-day hit since March...
The mainstream headlines credit the Fed's gloomy outlook (up to 15% unemployment by the end of the year) and concerns about a "second wave" of the virus, which we've warned about for months. The benchmark S&P 500 finished today down 6%.
We've been taking a cautious "when, not if" approach about a potential second wave once "reopenings" began.
And now, weeks since "unessential" people have been let back out into public again, some states like Georgia seem to be doing better than others – like Florida and Texas and Arizona, which are all seeing new highs in daily cases. Overall cases in the U.S. have topped 2 million.
We described the timeline of what was going on in China on February 26, the same day a U.S. Centers for Disease Control and Prevention official finally publicly acknowledged the virus would spread in the U.S. As we wrote then...
We're halfway through the year before we can even start thinking about shaking the coronavirus jitters... and gross domestic products ("GDPs") across the world will have taken blows.
What's more, our international editor Kim Iskyan has lived through a first wave – and a second wave of the virus, already – in his home country of Singapore. And as he warned in the April 8 Digest...
The experience of Singapore – which was so efficient at tackling the coronavirus that its curve didn't even need flattening – suggests that it's way too early for anyone in the U.S. or Europe to break out the Champagne, because a "second wave" is coming...
If even tiny, well-organized Singapore is suffering a "second wave" of the coronavirus, you can bet that New York, Italy, and anywhere else that looks like it's "flattening the curve" will, too.
Once asymptomatic carriers – as well as people who are sneezing up a storm – get out of lockdown, and social distancing becomes a relic of an early 2020 bad memory, the second wave will become real.
More from that Digest, as we wrote...
The second wave could be minor.
But we can't imagine the U.S. markets will react well if quarantines start all over again... or even if we're in "lockdown lite" for a while.
Indeed, U.S. Treasury Secretary Steve Mnuchin just said today, "We can't shut down the economy again." And President Donald Trump has similarly promised it won't happen, no matter what.
So what's an individual investor to do?
Especially given what appears to be a wide range of outcomes after a historic stock market rally and renewed uncertainties about the path of COVID-19 and all the concerns that come along with that?
Each of our editors have their own opinions, of course. But in the big picture, the consensus is two things...
- Diversify, and it's a good idea to own more portfolio protection than usual. (You can do that simply by holding cash or buying gold, for example.)
- There are smart buying (or shorting) opportunities also for the taking... (and NOT one that entails buying the recently bankrupt companies – like rental-car company Hertz that many new investors appear to be trading lately).
As we wrote in yesterday's Digest, short-term traders would be wise to check out Greg Diamond's service...
As stocks bounce around in the short term, Greg's technical trading approach in Ten Stock Trader can position traders in bullish or bearish plays on any sector or stock you could think of...
For every one of his trades, he provides clear risk-reward setups and specific reasoning and expectations.
Greg's technical analysis approach is perfect for a volatile environment, which is something that many of our editors suggest we could see in the weeks and months ahead at least. Just this morning, as stocks started to slide, he wrote to his Ten Stock Trader subscribers...
Fears of a second wave are hitting markets hard. Harder than I anticipated. Prepare for a battle over the next few days.
The short-term support levels in the Dow are holding, but not by much. I still view this as a correction from the recent highs, the question becomes how long.
Will the Fed step in? They are likely to defend their policies – more stimulus should be coming. If the virus is stronger in this second wave then it becomes a war between the virus and Fed stimulus.
This kind of style and risk might not be for everyone, but trading the way he does can result in some huge gains – and quickly.
As we said yesterday, Greg has delivered at least one triple-digit winner every other month for at least two years.
In February – before everyone and their mother knew about the company – he recommended a trade on Zoom Video Communications (ZM) that delivered a 45% return in a month...
And now one of the signals he relies on the most is pointing to a new opportunity in a company that has already given his subscribers a chance at 126% and 197% gains.
Click here to learn more now.
One more thing... 'Easy money,' of course, only helps businesses that are still open...
...And people who have jobs and steady income.
While the Fed's "juice" has proven over time to effectively goose the stock market higher and higher, the same can't be said for the fortunes of many of those on Main Street.
Income inequality was already at all-time highs before COVID-19 struck. And today, the gap is only widening between the haves and have-nots among the 70% of the economy powered by the American consumer... meaning you and I, and everyone else.
In particular, small businesses have taken a huge hit from the coronavirus and the ensuing lockdowns... and will again, should a second wave of the virus arrive in force.
The National Bureau Of Economic Research has estimated more than 100,000 small and medium-sized businesses have permanently shut down as a result of the coronavirus lockdowns.
That's 2% of all small businesses in the U.S. You've likely seen a few of your own local shops and restaurants share news about closings... We've seen them around here in Baltimore.
While 2% might not sound like a lot, when you consider the Fed said yesterday that it sees U.S. gross domestic product ("GDP") dropping by 6.5% this year and rising by 5% in 2021, the ratio shows the importance small businesses play in the economy.
No wonder Mnuchin said the disorganized and confusing Paycheck Protection Program ("PPP") – our words, not his – will be expanded from eight weeks of coverage for small-business owners to 24, as NewsWire analyst Nick Koziol reported yesterday...
This will allow more businesses to keep people employed, keeping money in people's pockets.
The Treasury also lowered the amount of money that had to be spent on payroll from 75% of the loan to 60%. So now businesses can use the loans to fund more essential expenses as their businesses begin reopening.
The Treasury said the extensions will "provide businesses with more time and flexibility to keep their employees on the payroll and ensure their continued operations as we safely reopen our country."
Just put it on the Underhills' – ahem, the Fed's – tab...
Mnuchin also said he believes more stimulus will be needed via another big "bipartisan plan" to keep the economy afloat, but that serious talks won't happen until Congress returns from vacation in July. (I guess they still haven't figured out how to work from home.)
In any event, expect trillions of more digitally-created dollars to appear eventually... It will be the Fed vs. Coronavirus: Round 2.
The Comeback of the American Consumer?
As communities across the U.S. continue their phased reopening, NewsWire editor C. Scott Garliss discusses how that's impacting the behavior of the American consumer, and what it means for investors.
Click here to watch this video right now. And for more free video content, subscribe to our Stansberry Research YouTube channel and follow us on Facebook, Instagram, and Twitter.
New 52-week highs (as of 6/10/20): Amazon (AMZN), Booz Allen Hamilton (BAH), DocuSign (DOCU), Electronic Arts (EA), Equinox Gold (EQX), JD.com (JD), KraneShares MSCI All China Health Care Index Fund (KURE), Microsoft (MSFT), Novo Nordisk (NVO), Sea Limited (SE), The Trade Desk (TTD), Vanguard Inflation-Protected Securities Fund (VIPSX), Victoria Gold (VITFF), and Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP).
In today's mailbag, a new investor shares his appreciation... Do you have a comment or question? As always, send them to feedback@stansberryresearch.com.
"Just want to thank you and your team. I am relatively new to investing, attempting to first 'take advantage' of these short term gains, and hopefully reinvesting into more stable, safe means of growth. The information you have been providing is very educational.
"I hope that as these turbulent times continue, I am able to take your advice to stabilize our financial position for the inevitable issues that are coming." – Paid-up subscriber Greg C.
All the best,