1/17/2020
Clearly, the bull market stays alive largely, if not entirely, on central bank stimulus. Should the Fed get repo under control and curtail the nightly purchases, the market will likely be tested.
The timing of the latest thrust coincides with the life of these what I’ll call emergency injections into repo. As macro strategist Julien Brigden points out, the phenomenal coincident moves in names like Apple and Tesla smacks of the dotcom bubble seeing its last thrust on Y2K-inspired Fed injections.
Throw in the other top three S&P holdings and we literally have a more concentrated market than we did in ‘99!
The Administration is now promising more election-year stimulus in the form of further tax cuts. Given the market’s willingness to interpret Fed action designed to avoid a liquidity crisis as a reason to rally (as opposed to a reason to sell [à la similar action leading into ‘08]) there’s no reason to believe that — despite further expanding the record federal deficit — a new round of tax cuts won’t get bought as well. Whether or not that buying will occur amid the throes of a strong correction — induced by the Fed pulling back from repo — is the question.
In fact, the prospects for further tax cuts I suspect has something to do with the past week’s strong move higher; i.e., the combination of present Fed stimulus and the prospects for future fiscal stimulus keeps FOMO (fear of missing out) alive and well.
As for the fundamentals, while the data is mixed, it doesn’t remotely support the latest action, nor present valuations — not even close!
It’s highly likely that this all ends badly; when the corporate debt bubble (historically inflated, and literally filled with low-quality issues) bursts. The Fed absolutely knows this and will continue to scramble to patch every leak. So who knows how long this can last?
They (the Fed) have to know that they’re ultimately making matters worse, but they’re human, and despite having taken the market past the point of no return (upon Powell pivoting to dovish when the debt market tried to correct in late ’18), they’re willing to continue printing and praying, at least for the time being.
Our new core allocation, trailed with out of the money puts, is absolutely the way to go right here…