At 8am this morning, the Fed unleashed another salvo to try to shore up the market and the economy.
This time, the Fed took the unprecedented steps of expanding the assets it will be buying from just Treasury bonds to corporate and municipal bonds. This will serve to shore up the balance sheets of private businesses as well as municipalities.
It’s a small step away from buying corporate debt to buying stocks. The Fed has not announced that move yet, but it now seems like it’s likely.
The Fed also removed its past limits on asset buying, making this new round of quantitative easing (QE) effectively unlimited in size.
That’s all in addition to the Fed’s March 15 announcement that it was cutting interest rates by a full percentage point, resuming QE, and cutting bank reserve requirements to zero. Two weeks before that, the Fed had cut rates by half a percentage point.
The Fed’s last two attempts did nothing much but create a short-lived jump in markets followed by an even deeper drop.
This time, the Fed’s unprecedented moves sent market futures up 4% just after 8am. This too proved short-lived, with that rise gone by the time markets opened at 9:30am.
This mild market response makes it look like the Fed is powerless in this economic downturn.
But the reality is quite different.
Yes, the markets have responded moderately at best to the Fed’s announcements and efforts. But that’s because the much bigger issue of the coronavirus epidemic is still hanging over the economy.
That’s the primary concern for traders right now.
Once we start turning the tide against the pandemic, and we will, the Fed’s actions will send the markets soaring.
Until then, the market will be a coiled spring, waiting to be released.
In other words, it’s not that the market isn’t reacting to the Fed. It’s that the reaction is delayed.
So for now, keep your powder dry or invested in the work-from-home stocks that we’ve talked about, like ZM and TDOC.
Great trading and God bless you,