Morning Comment: Can the Fed Solve the Economic Problems With Liquidity This Time?

The golf courses here in the People’s Republic of Massachusetts finally re-opened this past weekend. It was funny. For the first time in history, husbands played golf with their friends on Mother’s Day. Previously, in order to preserve domestic tranquility, the only husbands who played golf on Mother’s Day were the ones whose wives were also golfers (and whose children had grown and moved away).

However, the coronavirus changed everything this year. In households in Massachusetts (and around the country) this past weekend, the conversation went something like this: Husband…”Honey, I’m thinking about playing golf on Sunday with my buddies.” Wife…”Yes, PLEASE, PLEASE, PLSEASE play golf with your buddies on Mother’s Day. I married your for better or for worse, but NOT for 24 hours a day!!!!!”……In other words, this year’s Mother’s Day gifts were much different than they have been in the past!

Anyway, after two down weeks, the stock market saw a gain last week. The stock market has been stuck in a sideways range over the past month, but it is now at the top-end of that range. So if it can rally further, it’s going to be bullish on a short-term basis…as it will negate a possible “head & shoulders” pattern on the S&P 500. Thus there are certainly reasons for investors to remain optimistic going forward.

Of course, on the flip side, there are always reasons to be skeptical about any rally…even in the best bull markets…so this one is no different. The biggest concern right now is the fact that this rally has been a narrow one…which has been well documented by ourselves and many others. However, it’s also concerning that volume has fell dramatically last week…when the stock market was rising towards the top-end of its recent sideways range. The average volume (in the composite volume) fell a full 24% last week from the average weekly volume we’ve seen since the week the stock market topped-out in February! When you combine this with the way the stock market has frequently sold-off late in the day recently, it does indicate that the buying power in the stock market is beginning to wane.

That said, the market did rally right into the close on Friday and closed on its highs of the day. Therefore, even though there are some reasons to think that the investor interest in stocks is beginning to fade, that interest could return rather quickly if the market breaks-out of its sideways range to the upside. In other words, this week (which is also an expiration week) could be an important one for the stock market.

Of course, EVERY week is an important week now-a-days, but we also get some comments from Chairman Powell this week. The ability of the Fed to keep this rally going is essential…because the fundamentals certainly are not there to support the stock market at these levels. Yes, we understand why people want to look further out than the traditional 6-month lag that professional investors have taken into account when making their investment decisions over the decades. This healthcare issue should be a temporary one, so it makes sense that people are looking further-out than six months this time around.

However, if we’re honest with ourselves, we’ll admit that nobody has a clue how strongly the economy will bounce-back over the next 12-18 months. We have no idea if there will be a second wave of the Covid-19 virus…or if we’ll get a strong treatment for i…or even a vaccine. (A vaccine would obviously be incredibly bullish.) We also have no idea how strongly people will go back to their normal spending habits even if things do calm down in a substantial way on the healthcare front. Therefore, those who are bullish when they look “further out” than six months are merely basing their bullishness on “hope”…and little else.

Therefore, with “hope” being the only reason to bet that the fundamental back-drop will improve over the next 12-18 months, the ability of the Fed to push markets higher with their liquidity will be vital. The problem is that history tells us that the Fed’s liquidity works best in two different situations. The first situation is when the Fed initiates a major stimulus program after the markets have become washed-out. This makes their programs VERY effective in their initial stages…as it did this time around as well. However, over the past 10-12 years the problems the Fed has fought have all been financial ones. Therefore their efforts to solve the financial problems with financial solutions ALSO helped solve the economic problems. Therefore, the second stage of the rally was fueled by BOTH liquidity AND economic improvement.

This time around, the problem is an healthcare one. Therefore, although the Fed’s financial solutions have stabilized the credit markets and helped the markets rally strongly in the initial stage, there is no guarantee that we’ll see the same kind of further rally in this “second stage”…given that the economic issues are not going to be solved as quickly as it has over the past decade…because the healthcare issue will not be solved by the Fed’s “financial solutions”.

Since the Fed will not be able to solve both the financial issues and the economic issues the country faces right now with their liquidity injections this time around (like they have every time since the financial crisis), we are much less inclined to think that the stock market can rally a lot further from current levels. Therefore, we believe investors should be much more cautious right now than they have been when the Fed stepped to the plate to inject liquidity into the system over the past decade.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on May 11, 2020 — 9:05 AM
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