Last week the Dow Jones Industrial Average plummeted 1,862 points when Fed Chief Jay Powell announced that the economy was incredibly weak and he wouldn't even think about thinking about raising rates.
At the same time we had predictions of huge spikes in coronavirus in the South and West.
Today the Fed Chief made it clear that the economy remains weak and he has no plans to even think about raising rates.
At the same time we actually had gigantic spikes in the coronavirus in the South and West.
What happened? We rallied huge.
Same information, different results?
Kind of. With two differences: One, this time the Fed is going to be buying individual bonds to make sure that companies stay afloat - no survival of the fittest and making it clear that if the bond market gives even companies that would be bankrupt money, then you will do fine if you buy those bonds.
Second, we had the biggest retail sales gain, 17%, in one month that was the biggest month in history.
So, we have an accommodative Fed at the same time that we have much better data.That means we are headed toward a recovery and the Fed Chief is going to make sure it happens.
I know that there are many people out there who find this whole move totally specious if not fraudulent, based on momentum and uninformed investors piling into stocks. They have listened to the brilliant managers, Ray Dalio, Bill Ackman and Stan Druckenmiller, and they have been told that this is the most dangerous market, pretty much ever.
Yet if you bought when each of those managers told you to get out, now you would have made fortunes. On the other hand you have young investors, piling to the market and doing incredibly well, seemingly oblivious to the jeremiads of those who have made so much money that they have lost touch with what makes stock markets work. These young investors even poke fun at Warren Buffett, who was a seller, not a buyer, in this last collapse. They even mock him by buying the airline stocks he shunned. And they are making money hand over fist doing so.
What the heck is happening here and doesn't it have to end badly?
Let's take this period apart using the prism of a man who taught me a ton about how stocks work and why this moment was almost bound to happen.
The man's name? Marty Zweig. I never met Marty but I watched him on Fridays on Wall Street Week and I hung on his every word. I hung on them because he made so much sense of the stock market, perhaps the most of anyone who has ever lived.
Zweig helped democratize the market by explaining the market's reaction to the Federal Reserve and investors' collective reaction to the tape, the amalgamation of trading that occurs every day. I can hear him say them right now, his stentorian but low voice, saying "don't fight the Fed and don't fight the tape."
I have a lot of new, younger investors watching and while they can be an unruly bunch, so unruly that my daughter has said she regrets teaching me how to tweet, they need to learn what Marty meant by these two dictums.
First, don't fight the Fed means that you cannot fight a Federal Reserve chief who intends to get the stock market going. Last week the Fed chief only gave us the bad news. It was if he was throwing in the towel on the recovery, that he had done all he can and now we had to wait and see. The market was in no mood for wait and see. So this time what happens? He goes all in and basically assures there will be no more bankruptcies. No more lost jobs from public companies because they don't have the money because they can go to the credit markets, ask for money, and the Fed will give it to them. In the Great Depression we were worried about banks failing and they did, making the decline deeper and deeper. In the Great Recession we were worried about banks failing and they did until finally, after most of the big ones either disappeared or were on the ropes, he stepped up and said he would not let anymore banks collapse.
Now Powell's not only insuring the banks are going to make it but he's also insuring their larger clients are going to make it.
That's one half of what happened today.
The second part? Again you need Marty Zweig's second dictum: don't fight the tape. This one was very hard for me to understand when I first heard it. What was "the tape"? The answer? What was going on in the market because of the issues of the day. Right now we do have a spike in coronaviruses but we also got word that if doctors use dexamethasone, a pretty mild steroid, on the seriously ill, it reduced deaths by more than one third. In other words those who needed help to breathe, the sickest people, benefited from an off the shelf steroid that costs almost nothing.
That helped influence the tape.
Second, we got a 17% increase in the retail sales, which means that even as the Fed is throwing the gasoline on the coals, they are already red hot. Now that's when you get a conflagration of money looking for a home, especially because we know the Fed isn't going to raise rates, so why not just buy?
That's what you are doing with don't fight the tape. Whether it be the newbies buying all the cruise ships, airlines and low dollar amount oils, or any vehicles named Nikola (NKLA) or Tesla (TSLA) , whether it be Apple's (AAPL) stock flying high on a buy recommendation that had nothing pertinent to send it higher, whether it be the hint of an infrastructure bill, or the possibility that customers must be returning to once closed stores or we wouldn't have a 17% gain in retail, these all collectively created a tape that you cannot fight.
Is there anything certain about either of these two precepts? No, not really. That was Zweig's real point. You had to have faith in him and his words because this man really was the ultimate market historian.
I know as a successful fund manager I never once went against Zweig's views. You get this kind of buying, which impacts all but a downgrade of Nvidia (NVDA) by an analyst who wants to own second rated semiconductors because they do better in an improving economy, and you fight it, you are fighting history. Is it possible that the newbies know with this endless taking of the airlines and the travel related plays? No. Does it mean anything at all to the Dalios, the Ackmans or the Druckenmillers? In the case of the latter, yes, Stan basically admitted that he fought both the tape and the Fed. He fought Zweig.
Zweig sadly passed before he could come on CNBC and explain all of this to people. I can't do it as well as he can which is one reason why I can be hectored so easily. But in the truest of syllogisms, I know what I know, don't fight the fed and don't' fight the tape. And if you think that they can take a break like they did a week ago, remember that both the Fed and the buyers are allowed a day off. But the tape and the Fed are on the bulls' side and even though there is massive unemployment, it will be on the non-public side for the most part, the service part of the economy, the small businesses that can't make it work because of social distancing and sporadic outbreaks. The publicly traded stocks? They are riding a Zweig wave and that's one that's definitively worth surfing.