The Fed – A market Timer

The Dow Jones was yesterday 1’000 points in the red before the Fed announced they will start buying individual bonds. Also, the recent announcement of the buying of IG bonds and high yield ETFs was perfectly timed if you look at it from the equity side.

Fig. 1: The starting point to buy individual bonds caused an intra-day reversal in the US equity markets

The reaction to this recycled statement from March was amazing. However, it seems that the Fed chooses deliberately weak trading days to start with announced actions.

When the Fed announced that they will buy fallen angles and high yield bonds the market re-opened for fallen angles, and companies like Boeing or Ford were able to raise capital via new issued bonds.

The functionality of financial markets is, however, the main function the Fed officially tries to achieve. The side effects are a further tightening of spreads and rising stock markets.

Fig. 2: The recent announced and started unconventional Fed measurements

Fig. 3: S&P 500 future stopped its fall at its 100-day moving average

The key question is if we are in a bear market or if the recent started strong rise of prices since late March is the beginning of a longer lasting bull market.

Fig. 4: Bull or bear Market? That is the question

We are continuing to be in the camp between U- and V-shape recovery. The important information is recovery in 2021. As the Fed announced minus 6.5% US GDP in 2020 will be followed by more than plus 5% GDP growth in 2021.

If that is the case, equites and corporate bonds should continue to perform well. As a hedge one might add physical gold into a portfolio to have a partial hedge.

Besides JPM and GS, BlackRock is now as well forecasting that in 2021 we will see a revival of inflation in the US. This pared with US Fed rates at zero until the end of 2022 is a good ground for the three mentioned asset classes. The climbing the wall of worry is at least since yesterday continuing with very thin volumes and is probably again driven by the retail investors while the institutional investors keep underinvested in risky assets.

Yesterday showed it again, that it is very painful to fight against the Fed.

Published: 16/06/20 by Blackfort CIO Dr. Andreas Bickel

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