The Federal Reserve on Thursday (April 9th) announced unprecedented monetary stimulus actions to provide up
to $2.3 trillion in loans to support the economy. These actions are in addition to the massive "quantitative easing" purchases of Treasury and Mortgage-backed securities that the Fed has carried out to ease liquidity problems in the financial markets over the last six months.
According to Fed Chairman Jay Powell in comments last Thursday, "Our country's highest priority must be to address this public health
crisis, providing care for the ill and limiting the further spread of
the virus. The
Fed's role is to provide as much relief and stability as we can during
this period of constrained economic activity, and our actions today will
help ensure that the eventual recovery is as vigorous as possible."
If we add up all the U.S. fiscal and monetary stimulus actions over just the last couple of months (actual and proposed), the number is approximately $5 trillion! Despite these actions, several major Wall Street investment firms are now forecasting declines in U.S. GDP of between 15% and 30% in the second quarter and an unemployment rate that could skyrocket to as high as 20%.
After plunging 35.4% in only 23 trading days between February 19th and March 23rd, the benchmark S&P 500 Index has rebounded 27.3% in just 13 trading days to last Thursday's recovery high. This recovery represents approximately 50% of the total decline from the February 19th all-time record high to March 23rd's reaction low.
In my last column dated March 18, I voiced a rare bullish call based upon sentiment numbers that reflected levels of extreme bearishness that often mark a bottom and also historically high insider buying numbers. Of course, massive Fed intervention to drive interest rates to near zero and to add liquidity to the financial markets allowed for justification to re-enter the stock markets on the long side.
So what now?
Even though investors are often safe by following the old axiom "Don't fight the Fed", I don't believe the current rally in stock prices (even with the Fed's support) can last without at least a test of the intra-day lows posted on March 23rd. In percentage terms, a fresh decline from last Thursday's closing price of 2,790 in the S&P 500 to near the late March low at 2,192 would represent a loss of approximately -20%! And given the uncertainties relating to the potential consequences from the current global pandemic (like massively NEGATIVE Q-2 corporate earnings and NO MEANINGFUL SHARE BUYBACK ACTIVITY), we just can't rule out an even steeper decline in what may be a persistent bear trend that penetrates the March lows before markets stabilize with several months of base building action ahead of the next potential meaningful rebound.
