The bear market for the Dow is over – technically.
You’re likely to see any number of headlines to that effect. Hopefully, all of the accompanying stories will be dripping with sarcasm.
It’s true that the Dow staged its biggest three-day advance (some 21%) since 1931 through Thursday, but no serious market observer would suggest we’re no longer in trouble, let alone totally out of the woods. Indeed, the narrative right now is that US equities will almost surely revisit local lows before making a final bottom, on the way to eventually rebounding in earnest as the virus runs its course in the US.
One of the many amusing aspects of the COVID-19 bear market is the extent to which it shattered the assumption that nothing could stop equities’ inexorable rise, the final leg of which many (correctly) attributed to the Fed’s opening of the liquidity spigots in the wake of September’s repo squeeze.
As it turns out, that steady “morphine” drip of liquidity (for “reserve management” purposes) proved wholly insufficient in the face of an existential threat to the global economy in the form of a pandemic that has now shuttered the services sector across much of the western world after rampaging through China in January and February.
Now, though, the Fed is back in game in earnest with “real” QE, and in unlimited quantities. The Fed’s balance sheet had, of course, already gone “vertical” again (see the red line in the visual).
But, as of the latest read, the Fed’s mountain of assets has grown to $5.254 trillion.
Although this isn’t really “surprising” given the Fed came into this week having completed around half of the $700 billion in new purchases announced on March 15, and considering the fact that Monday brought the announcement of open-ended QE (along with a raft of other measures including a corporate bond buying program), it’s still worth pointing out that the Fed’s balance sheet has grown $586 billion over just five business days.
So, when it comes to asset prices, the matchup is: Unlimited Fed buying versus a deadly, highly contagious respiratory infection.
Pick a winner.