As the S&P 500 grinds towards 2950, up a staggering 34% from its lows on March 23, U.S. Fed Chair Powell presided yesterday over a virtual FOMC press conference. He aired a sigh of relief and perhaps looked less weary following all the emergency measures taken over the past month. Having taken rates down to 0 and announced a $2 trillion stimulus bill, along with host of other abbreviated schemes handing out money to everyone, the U.S. Fed for the first time also opted to buy out corporate bonds and junk bonds. This is a step beyond the 2008 playbook; few steps beyond Ben Bernanke even.
Now that President Trump is off his case for cutting rates even more, there is nothing more Powell can do. The angry tweets have ended. President Trump is very happy. Now it seems his focus is shifting towards getting compensation from Saudi Arabia for the oil price war and China for concealing facts about the Coronavirus. It seems someone is always the target to veer the voters away from domestic inefficiencies.
At the press conference, Powell did everything to soothe the markets by saying "they will do whatever it takes" to make sure the economy recovers. It is committed to using its full tools necessary to support the economy. The next jobs report may show double-digit job losses and the economy will drop at an unprecedented rate in the second quarter. They seem to be happy with the pace of asset purchases and policy response, but they will be in no hurry to raise rates or take it back.
That seems to be the never ending vicious cycle of the U.S. Fed. They keep printing out of one collapse to the other, each time more debt is needed to fuel the expansion even further. The truth is they know that the system cannot survive without this "additional QE". The correct thing would be to trim or normalize their balance sheet when markets recover, but that is not happening at all -- they just keep it there, and add more if there is any hiccup. This is such a simple question to ask at the FOMC press conference, yet no one bothers to do so, as the Fed knows very well it is hiding behind it all. Before he took his post, Fed Powell used to always claim that the Fed is not in the business to support asset markets, yet today he is doing exactly that. It is so obvious.
Tracking the S&P 500 index can be a bit misleading as it really caters to the top five stocks, Microsoft (MSFT) , Apple (AAPL) , Amazon (AMZN) , Google (GOOGL) , and Facebook (FB) . These five stocks make up about 22% of the entire market cap of the index. Going back historically, this has never ended well when market leadership is so narrow. As we enter this week with earnings from these top five companies, the direction will be led by their earnings.
Advertising revenue has been a big concern for these names, as companies slash their budgets for the entire year. Google and Facebook came out with better-than-expected numbers on the ad side, and provided a bit of positive commentary on recovery in April. That was all it took for the markets to rejoice and break through technical resistance levels. Microsoft also reported a strong earnings beat. When numbers are lowered into the quarter, the bar is very low.
No company reported so far has officially given guidance for Q2, which is expected to be the worst quarter in history ever. It seems the market is willing to look past 2020 entirely, and focus on 2021 multiples. We came into the year expecting 10% year-over-year EPS growth, and now will probably see around 10%-15% decline year over year. With the S&P 500 trading where it is, it implies significant multiple expansion. At the end of the day, we may be able to look past a "horrid" quarter, but can investors justify adding to market here at multiples of 25x-30x earnings?
Looking at the U.S. Fed balance sheet week on week, it suggests a slowing in the rate of purchases from $600 billion weekly run rate to about $200 billion over the past few weeks. Even looking at the MBS and Treasury amount of purchases, the daily $100 billion amount is gradually being reduced down to $20 billion as we enter May. They are trimming the amount of their unlimited QE buying, so to speak. Perhaps that speaks to the Fed's sensitivity on market ranges, aggressive support around 2200 and taking their foot off the pedal around 2900? It remains to be seen.
This market is driven more by algo traders, as they are the ones switching from long to short as the S&P 500 tries to break 2850 to the upside or threaten 2750 on the downside. It has been stuck in a tight range of 150 points over the past month. Bulls are trying to touch the 61.8% Fibonacci retracement level of 2930, which we touched yesterday, opening the way to hitting the 200-day moving average level of 2970-3000. This area will be met with a lot of resistance. The daily Relative Strength Index looks tired and overbought. Bears will need to capture 2850, allowing it to move down to 2650, even.
Most Hedge Funds have de-risked and are not involved in this market rally. We all know that we are past the global peak infection cases and economies are slowly reopening, but is it safe to assume that demand and life returns to normal as it was in January? We need to learn to live in a post-COVID world with a vaccine yet to be produced, which means slower consumer spending and lower overall demand growth. The Fed can keep printing and buying assets, but to force the consumer to spend after 30 million Americans have lost their job for good, is a tall order.