Good News, Bulls: The Fed’s Got Your Back

Federal Reserve Chairman Jerome Powell

Stocks are trading flat this morning as investors await another stimulus package. The market’s recovered from its sudden Friday drop when Wall Street learned that President Trump had Covid-19.

Yesterday, Trump left Walter Reed National Military Medical Center and bulls roared in response. As did the mainstream media, who called the president “irresponsible” (among other less pleasant things) for removing his mask temporarily upon returning to the White House.

Trump also told Americans to not fear Covid-19, nor to let the disease take control of their lives.

Which, again, prompted a severe reaction from many prominent newscasters and analysts.

Now, in order to push higher, equities will likely need Senate Republicans and House Democrats to reach an agreement.

“We need stimulus. The bottom line is this is a health crisis, and the health crisis is far from over,” said Chris Ailman, CalSTRS’s chief investment officer.

“I’m pretty concerned about the risks in front of us, the fact that the market is so top-heavy in the famous five stocks.”

The “famous five” in this case are the Big Tech companies that have erupted since the Covid-19 pandemic began. FAANG is down today, as is the tech-heavy Nasdaq Composite, but the group of stocks could easily punch higher on positive stimulus news.

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And it’s not just bulls that want a new relief package, either. Fed Chairman Jerome Powell asked Congress this morning for additional stimulus in a statement made to the National Association for Business Economics.

“The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods,” Powell said.

“While the combined effects of fiscal and monetary policy have aided the solid recovery of the labor market so far, there is still a long way to go.”

He also remarked that “the risks of overdoing it seem, for now, to be smaller.”

Powell believes there’s little danger involved with another round of stimulus. Instead, he claims the true hazard is a lack of stimulus, which could “lead to a weak recovery, creating unnecessary hardship for households and businesses.”

And while that’s true in a short-term sense, long-term, going overboard with stimulus – something a handful of analysts argue has happened already – will ultimately prove damaging.

But it isn’t Powell’s job to safeguard the U.S. economy. He’s supposed to carry out the mandate of the Federal Reserve, which seeks to (1) maximize employment, (2) stabilize prices, and (3) keep long-term interest rates in check.

From Powell’s point of view, he’s pushing for action that supports all three pillars of the Fed’s foundation.

Even if the dollar gets raided and U.S. debt hits astronomical highs in the process.

But for traders, an agreed-upon stimulus package will undoubtedly be a boon. Those who bought-in following the September dip are already enjoying some quick gains.

Those profits could multiply in a parabolic move higher if additional relief arrives – something that many folks, chief negotiators Mnuchin and Pelosi included, see as a near-inevitability at this point.

Even with a contentious presidential election set to take place in less than a month.

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