The Dow’s down, the S&P’s flat, and the Nasdaq Composite is up. Meanwhile, coronavirus cases climb even higher.
The market’s been stuck in a pattern of “sideways chop” since it plunged in early June and investors remain crisscrossed on where it’s headed next.
Still, FAANG (plus Microsoft) continue to impress.
“It’s the same group of stocks that lead us higher almost on a daily basis,” Peter Cardillo, chief market economist at Spartan Capital Securities, said.
“The rest of the market follows, but it’s certainly nowhere near as strong as that group.”
Covid-19, which sets new infection records day after day, has lost its potency. Bulls aren’t afraid of the disease any longer. The mortality rate has collapsed.
So, stocks should surge, right?
Well, not exactly. The economic damage stemming from the coronavirus lockdown is severe. And according to Atlanta Fed chief Raphael Bostic, it could take longer to heal than expected.
“There are a couple of things that we are seeing and some of them are troubling and might suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise,” Bostic told the Financial Times this morning. He then went on to add that the economy appears to be “leveling off.”
“[We’re] trying to figure out whether this levelling off is something that is a more sustained pattern, or just a pause,” Bostic explained.
“Given that possibility, [we need] to start thinking about what the next relief package should look like.”
His mention of another “relief package” sent precious metals soaring. Gold and silver now both sit at or near their cycle highs.
And for good reason.
The Fed’s new lending facilities allow the central bank to give money directly to businesses and governments.
Nobel winning economist Milton Friedman once proposed the idea of “helicopter money,” in which a helicopter flies over a community, dropping $1,000 in bills from the sky. The cash is then hastily collected by members of said community, who understand that it’s a unique event which will never be repeated.
Friedman’s unconventional monetary policy has long been suggested as an alternative to quantitative easing (QE). Ben Bernanke once famously joked that if all else fails, the Fed can simply “drop money from a helicopter.”
Now, the Fed can do it with impunity if it so wishes. The act of “helicopter stimulus” will undoubtedly keep stocks on life support, but it may also leave the dollar in a highly weakened state.
A scenario in which the market rises more slowly than inflation seems farfetched these days. If the Fed goes the “helicopter” route, however, it will be an inevitability.
And if stocks break out of their current choppiness to the downside, the Fed will be tempted to provide additional cash injections to the market, lifting up equities but damning the dollar.
We’ve heard the warnings from “goldbugs” before – that inflation will come to wreck the economy. They said the same things back in 2009, too.
But in 2020, the game has changed. The Fed’s balance sheet has ballooned like never before. The recent round of stimulus is completely unprecedented, and unlikely to be topped within our lifetimes.
Eventually, the Fed will have to draw a line in the sand and choose between the market or the dollar. That might not happen next week, but at this rate, it’s coming sooner rather than later.
And, sadly, there’s nothing we can do to stop it.
Just don’t be surprised when the next market-wide dip “sticks” if stocks are left un-rescued by the Fed.