That was a strange Easter, wasn’t it?
Are you looking forward to the easing of these social distancing restrictions?
I certainly am.
My wife reckons we’re in this situation for another six months. I think we’ll start to see the relaxation of a few rules by the end of April.
But who knows?
Judging by the market’s latest bounce back, it’s suggesting we’ll get back to normal sooner rather than later too.
Or maybe not…
The collapse you saw in late February and March was the fastest stock market collapse on record. We were always going to get a bounce at some point.
As you can see in the chart of the ASX 200 below, that bounce has been underway for a few weeks now. It hasn’t even hit any important resistance levels. So purely from a technical perspective, it could rally further.
My feeling is that there is a decent chance the 23 March low is THE low for this move. At least it probably was for a lot of the stocks that will do well when the economy gets back on track again.
What do I mean by that?
Back in the GFC, markets crashed and made a panic low in October/November 2008. They recovered over the next few months, but then went on to make another (final) low in March 2009.
However, a lot of the stocks that lead the rebound (a lot of the mining stocks come to mind) made a higher low in March 2009. That is, the bottom for them occurred in October/November 2008, not March 2009.
At times like this, it’s worth remembering that you’re dealing with a market of stocks, not a stock market.
Turning to the S&P 500, its bounce-back rally has been much stronger. As you can see below, it recovered nearly 50% of the ground it lost in the crash.
But it fell around 1% in overnight trade (US stocks trade on Easter Monday). Is this as good as it gets, for the time being at least?
To get back to the 23 March lows, the S&P 500 would need to fall around 20%. While I think the panic selling days of 10% moves are behind us, this could easily happen in the space of a few weeks or months.
This could be the start of a bubble phase
So what caused investors to push the S&P up nearly 25% from the lows? Hope that things will get back to normal sooner rather than later is one reason.
The other reason, not surprisingly, is the Fed. Its response to this crisis has been truly historic. From Doug Noland’s latest Credit Bubble Bulletin:
‘Federal Reserve Assets surpassed $6.0 TN for the first time, having inflated another $272 billion for the week (to $6.083 TN). Fed Assets inflated an astonishing $1.925 TN, or 46%, in only six weeks. Bank of American analysts this week suggested the Fed’s balance sheet could reach $9.0 TN by year-end.
‘M2 “money supply” surged another $371 billion for the week (ending 3/30) to a record $16.669 TN. M2 expanded an unprecedented $1.136 TN over five weeks (up $2.123 TN, or 14.6%, y-o-y). For some perspective, M2 has expanded more during the past six months than it did the entire nineties (no slouch of a decade in terms of monetary inflation). Not included in M2, Institutional Money Fund Assets expanded an unparalleled $676 billion in five weeks to a record $2.935 TN. Total Money Fund Assets were up $1.375 TN, or 44%, over the past year to a record $4.473 TN.’
The Fed is now a buyer of US Treasuries, mortgage-backed securities, corporate bonds, junk bonds, municipal debt, bond ETFs and ‘main street loans’.
If COVID-19 popped the credit bubble, the Fed is doing everything it can to replace the air streaming out of the hole.
It has reflated prices partially, as you can see in the chart above. You can also see it in the gold price. Late last week, gold futures rallied sharply to close just over US$1,750 an ounce. The futures price was up again overnight, and was trading at US$1,763 at the time of writing.
To think that gold hit a low of US$1,477 on 18 March! At the time, Dan Denning, Shae Russell and I suggested it was a great buying opportunity. It’s certainly turned out that way in the short term.
But has it now gone too far, too fast in the other direction?
Sure, it makes sense that gold will rise strongly in a scenario where the Fed has lost the plot. But you should be wary about any asset that rises too quickly. Gold has rallied nearly 20% in less than a month. That’s quite a move.
If it’s moving into a bubble phase, then this could just be the start. In bubbles, you can forget all about rational analysis. You just have to hold and hope.
But if we’re still in the preliminary stages of this gold bull (I think this is the more likely scenario), then we could be getting close to a short-term top.
That needn’t be a cause for concern though. As I hope you’ve learned over the past few years, in bull markets, the name of the game is to buy the dip. Gold is still in a bull market.
The S&P 500? Not so much.
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