Strategies While it managed to shift the market’s mood and stem investor losses, at least for a while, the Federal Reserve is battling something much bigger this time, our columnist says. “Don’t fight the Fed. ” That old Wall Street adage about the Federal Reserve has never rung so true. After weeks of dropping like a stone, the stock market began to catapult upward on Tuesday, Wednesday and Thursday.
Tuesday’s trajectory deserves to be called extraordinary: The Dow Jones industrial average’s 11. 4 percent gain was its greatest in a single day since 1933. By the market close on Thursday, the Dow had risen more than 20 percent from its nadir on Monday — enough, in technical terms, to qualify as a “bull market. ” Most often, I find it is pointless to try to explain the market’s moment-to moment moves.
Despite the chatter, it usually amounts to little more than random noise. But there are exceptions, and this seems to be one of those times. Among the myriad, and often spurious, explanations for the market’s abrupt change of mood, I think there is a compelling explanation: the Fed. So does Edward Yardeni, an independent Wall Street economist who has published a new and exquisitely timed book: “Fed Watching for Fun and Profit.
” In a telephone conversation from his home on Long Island, he said: “The Fed decided it had to really shock and awe the markets, and it did the job. You can see the results yourself. ” On Monday, the Fed announced that it would, essentially, take whatever actions were needed to restore stability in the markets, as well as the economy. Referring to the unorthodox monetary policies known as “quantitative easing,” which the Fed put into effect to combat the global financial crisis of 2007-08, he said the new policy amounted to “quantitative easing to infinity and beyond.
” The Fed’s new policies are so large, and operate on so many fronts, that they are difficult even to catalog. In addition to lowering short-term interest rates to a nearly zero, the central bank will buy Treasury securities, government agency securities and corporate bonds. Beyond that, the newly enacted fiscal stimulus package will enable it to increase its already immense firepower by as much as $4 trillion. An extremely confident Jerome H.
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Powell, the Fed chair, sent out a clear message on the “Today” show on Thursday, saying: “When it comes to this lending, we’re not going to run out of ammunition. ” Fight the Fed, in other words, and you will face a virtually limitless financial arsenal. No wonder traders were stunned into submission. In the face of the Fed’s intention to bolster the markets, they stopped dumping stocks and began to gobble them up.
Yet any central bank’s ability to turn an entire economy around is severely limited under any circumstances. In the face of a pandemic, and what increasingly looks like a severe global recession, even the Fed can provide only partial remedies, at best. But financial markets are another matter.
“They are far more susceptible to Fed intervention, at least for brief intervals, like the one we have just seen.”
While the forthcoming $2 trillion federal fiscal stimulus package is no small matter, rarely has the Fed’s power to wow the markets been on greater display. Money, known in financial lingo as liquidity, is flowing into credit markets, which had threatened to seize up as they did in the last financial crisis. The pricing of exchange-traded bond funds — mutual funds that trade all day like stocks — has returned to a semblance of normality, thanks to the Fed’s intervention in the bond market. And riskier assets like stocks have received a therapeutic jolt, now that the Fed has made it absolutely clear that it will do whatever it takes.
Double-digit gains in stock prices over just a few days may already be enough to have fundamentally shifted traders’ approach to stocks, Mr. Yardeni said. The Fed acted, and the stock market “just took off,” he said. He added that it was quite possible that the Fed had really reversed the bear market’s tide, and “that the market has already reached a bottom.
” That is a fundamental question for investors. After the terrible losses of much of February and March, is the bear market really over? I doubt it. While I’m continuing to invest in stocks, I’m not assuming that the worst is over in the markets, because weeks and perhaps months of terrible events are just beginning.
On Thursday morning, for example, the Labor Department announced that 3. 28 million Americans had filed for unemployment benefits in a single week. That wasn’t merely the largest total in history: It dwarfed the previous record by a factor of nearly five. And next week’s number could easily be worse.
Yet that was the least of it. Also on Thursday, a New York Times database showed that more than 1,000 American deaths had already been linked to the coronavirus, nearly 40 percent of them in New York. In the United States, the pandemic is, by most accounts, still in its early stages. Shortages of protective equipment, hospital beds and trained medical personnel are just beginning to be felt in New York City, the epicenter of the American epidemic.
The severity of the economic fallout is only beginning to be measured. Economists at JPMorgan Chase now predict that the decline in gross domestic product in the United States, expressed as a seasonally adjusted annual rate, will be more than 10 percent in the current quarter and more than 25 percent from April through June. How steep the drop in G. D.
P. will actually be is anybody’s guess, but it will be certainly be bad. Whether the stock market, which gave up ground on Friday, can rise in the face of such calamities seems highly questionable, while the performance of the federal government has so far been less than inspiring. “If we don’t get the pandemic under control,” Mr.
Yardeni said, “I don’t know what the Fed is going to do about it. ” I hope we don’t have to find out. The Fed’s intervention has been comforting, but awesome as it may be, the Fed can’t beat the coronavirus.
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