Fed gives the stock market another push

Article about Fed gives the stock market another push

Jun 16, 2020

The long-awaited correction

After the surprising and spectacular rally of recent months, share prices suddenly started to fall last week. There were several reasons for this. The US central bank was rather gloomy about the economic outlook, institutions such as the IMF and the OECD even downright negative. New corona attacks in China and the United States came on top of that. The virus had almost been forgotten, but still appeared to be among us. Had investors perhaps put on a somewhat too rose-coloured pair of glasses and were they anticipating an economic recovery that might take a little longer? Whatever the real reason - after all, investors never mention the reason when they sell - the stock exchanges seemed to need correction. And so it happened. Yesterday, for example, the S&P index was 8 percent lower than last week.

Do not fight the Fed

The ink from the newspaper reports declaring the relief rally dead had not dried up yet or the prices suddenly started to rise again early in the evening. The Federal Reserve had just announced its intention to buy back corporate bonds. A measure with which the U.S. central bank once again raised a warning finger towards investors who had lost faith in the ongoing rally. "Do not fight the Fed" is the adage on the stock exchange. Experienced stockbrokers know that there is no point in going against this all-powerful player. Join the central bank or if you have no faith in the policy, stay on the sidelines. But don't ever argue with it. It almost certainly leads to loss.

Emergency loan programme

The Federal Reserve is deploying an emergency lending programme with which it has so far only invested money in Exchange Traded Funds, listed funds that invest in corporate bonds. Now the central bank chooses a more direct approach. The emergency lending program used, one of nine announced by the Federal Reserve since March to defuse the corona crisis has a capacity of $250 billion. To date, only USD 5.5 billion has been invested in these ETFs.

Individual corporate bonds

As of today, the central bank is also going to buy up individual corporate loans. Not all business loans are eligible. Issuing companies, for example, must have a minimum credit rating. In addition, there is a maximum term for the bonds. The number of bonds that will be bought on a daily basis has not been disclosed. The Fed also said that the pace could be slowed once the corporate bond market recovered. In the event of deterioration, the pace can also be increased if desired.

Are you all right?

One might also wonder to what extent the corporate bond market needs this support. For example, earlier announcements by the Fed already contributed to the recovery of both investment grade and high yield bonds. The index for the first has already reached pre-crisis levels. The index for high yield bonds, although not yet, is only six percent off. Not exactly a reason for great concern, one would say. The aforementioned $5.5 billion isn't exactly an impressive amount either. The central bank had already largely achieved its objective by means of a management by-speech.

Completely hopeless

Corrections on the stock market seem to have the life of overweight mice near a hungry aggressive cat: completely out of the question. The mice will continue to squeak, but the cat still rules on the trading floor.

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Articles authored by Robert Jan Teuwissen

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