Since the lows hit in October 2019 and markets being range bound for past year and a half, the S&P 500 is up 9%. The press has sensationalized each headline on Trade Wars and how every headline is driving it higher when we have had the same tweet update, "U.S./China talks going well, close to a deal" being reported for the 18576th time. Truth be told, the Trade Wars or a deal being reached will not change anything other than push the market in the direction it wants to take. The Federal Reserve started increasing its balance sheet as of mid-September 2019, and that is when the S&P 500 bottomed.
With the latest $13 billion increase as of yesterday to $4.058 trillion, with the entire 2019 quantitative tightening (QT) efforts have been completely erased in less than three months. If one were to combine the total monthly balance sheet expansion of the Fed, BoJ, and the ECB, it will end this year at the highest since 2017 as each one soaks up bonds and various instruments in their market to ease the strain on money markets and stimulate the economy in any way. Just like a very old tired car, it takes more and more effort to get it started again, and when it does, the distance it travels gets less and less for the same amount of energy you put in. But it does move, and that is where we are right now.
The Fed can say what they want and finagle its way into calling this a "mid-cycle adjustment" or not-QE, the fact of the matter remains that they are adding net liquidity into the system via overnight repos and the buying of Treasury bills. This money does and will feed into the main risk assets as cheap money gets used up to buy even more risky assets to earn the yield everyone is so desperate to generate. This does the bare minimum to the real economy (someone should tell the American people that) except for getting the rich even richer as stock market and assets inflate. Neither the Fed nor President Trump can afford to nor will let the stock market drop at all as both their careers rest upon the level of the S&P 500. Even though it is majority Technology companies, so one can argue both are working for big Tech, but that debate is for another day.
Central banks globally have been in easing mode during this year as a panic slowdown got everyone running scared. Year to date 60 central banks have cut their policy interest rates 113 times by a total of 47.21 percentage points, completely offsetting the 43.4 percentage interest rate hikes in 2018. This doesn't even include additional measures taken by various central banks in boosting the economy through "creative" alternate measures. The PBOC last night injected another 300 billion Yuan via one year medium lending facility (MLF) at 3.25%. To surmise, globally we are trying to jump start a car that was on the verge of coming to a dead halt last year, but its shelf life has been extended for a bit longer. Central banks must be careful what they wish for. It seems most are terrified of being Japanified or Japanification, so are trying to stimulate their way out of the rabbit hole.
So, what does this mean for markets? Numbers have come down no doubt. With all this easing, the central banks will produce the much needed growth the market wants and needs to see as it is firmly in the show-me-the-growth phase. They are aiming to stoke inflation and will do whatever it takes to get there it seems and sustainably above 2%. The data in November has already seen an improvement off of the lows, and more needs to be seen to confirm this bottom in place. The asset classes that will benefit the most will be Commodities as they tend to be the biggest beneficiaries of growth bottoming and inflation picking up.
Within the Commodity space, one needs to look at each market's demand supply dynamics and select one that has the tightest market balance and strongest fundamentals, and that is Copper. Copper has been firmly trading between $5800-$6000/tonne all year despite horrendously weak data and slowing global economic growth especially with China deteriorating as well. That just shows how well balanced the lower demand is offsetting the lack of a supply increase in markets. If we even get a glimpse of a growth rebound, Copper will rally the hardest and along with it Copper exposed mining Equities, with the likes of Antofagasta (LSE: ANTO), Kaz Minerals (LSE: KAZ), and Rio Tinto (RIO) amongst the large caps. One needs to be careful in the smaller copper players due to cost and margin problems but needless to say, any company showing any hint of copper growth, which is rare these days, will benefit.
The chartists have been waiting for the past year and half to see a breakout which is occurring in the S&P 500 as it rests on 3100 support and slowly grinds higher. That uptrend will not stop as long as the Fed is easing and increasing its balance sheet. Oh apologies, the not-balance-sheet balance sheet increase.