The Federal Reserve couldn’t wait until Wednesday to deliver the news it is delivering more assistance to curb the economic impact from actions being taken to curb the spread of the coronavirus.
- $500 billion in treasury purchases
- $200 billion in agency mortgage-backed securities
- Cutting interest rates to 0.00% - 0.25%
- Coordinated action with other central banks to improve liquidity 50 bp
- Bank reserve ratio lowered to 0.00% beginning March 26
- Discount rate cut 150 bps to 0.25%
The reasons for these moves, including enhanced liquidity in global banking plumbing (wants weaker dollar), encouraging banks to lend (especially mortgage and refinancing) and assist in investor confidence.
But these moves also underscore the fact the Fed blew it big time in 2018 when it hiked rates four times and hinted at even more rate hikes. The Fed was behind the world and its actions put the banking system in an even more precarious situation. Again, this is proven by emergency actions to keep cash flowing in the system via repo operations.
I disagree with the assessment the actions by the Fed are generating fear, but there is truth to the fact the Fed has lost a lot of credibility over recent years. Therefore, large doses of skepticism greet current moves.
Federal Government
The House sent a stimulus package to the Senate, but there must be a lot more done that reaches deeper into the economy.
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I’m hearing there will be a second stimulus bill with even more specific focus on small businesses, and not just loans that won’t help at any interest rate. The pace of help from Congress will help tremendously and there is no room for politics as usual.
Steps announced by the White House on Friday point to the importance of public-private partnerships to overcome limitations of the federal government.
Handicapping the Unknown
Over the weekend, Goldman Sachs adjusted its growth model and market outlook for the third time in little more than a week.
GDP
- 1Q 2020 0.0%
- 2Q 2020 -5.0%
- 3Q 2020 +3.0%
- 4Q 2020 +4.0%
Goldman sees the S&P 500 vulnerable to 2,000 before rebounding. Last week, Goldman rightfully pointed out the action in the economy and market will naturally be a V-shaped move. In fact, Goldman still sees S&P yearend at 3,200. That would be mindboggling.
If indeed there is a technical recession with first and second-quarter GDP in contraction and a second half rebound, the stock market will move before then just as it bottomed in February and March 2009 before the recession ended in June 2009.
What we saw last week was investors selling winners in part to meet margin calls but also out of panic. The hit some of the best companies in the world took is remarkable and is the essence of panic-selling, which feeds on itself until exhausted.
This morning major indices immediately tested the lows of last week including S&P 500 2,479.
Everything Through Lens of Disaster
Last week, Senator Sherrod Brown of Ohio called out big banks for continuing their buyback programs in the middle of a global pandemic. Such rhetoric would have fallen on deaf ears not long ago, but this morning, eight big banks have announced suspension of buy backs.
Their statement called it a preemptive action to help support customers. Pressure increased yesterday after the emergency Fed action, which is all designed to pour money into the banks ostensible to lend it to Main Street.
- Goldman Sachs
- JP Morgan
- Bank of America
- Wells Fargo
- Morgan Stanley
- Bank of New York Mellon
- State Street
- U.S. Bancorp
The problem with the news is the street is wondering if something is wrong with the banking system. It’s reasonable to think big banks are selfish and would never make altruistic moves by lending money rather than hoarding it to ride out the hysteria. But I also think the political climate is changing, and these are simply smart moves.
Either way, banks are getting hammered this morning, but probably for the wrong reasons.
Today’s Session
Selling begets selling and hysteria begets hysteria.
We are working hard reevaluating balance sheets and other metrics to refine our buy list. This sell-off is creating a generational buying opportunity, and while picking (read guessing) bottoms is folly, now is the time to seek out those opportunities.
Last Friday’s session underscores the pent-up demand for stocks and the chance for the market to soar once the coast is clearing.
Clearing = evidence the worst is over; it means slower coronavirus growth in the United States after the natural spike when testing becomes more readily available.
The stock market will sense this before it becomes official.
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