Bull Market? No, The Bear Still Rules For Now
The comments below are an edited and abridged synopsis of an article by Lance Roberts
The market has sold off, forcing the Fed to inject more liquidity to try and stabilize the broken credit market.
The bear market won’t be over until the credit market is fixed. We are a long way from that, given the blowout in yields.
However, the Fed is throwing the kitchen sink at the issue. In the past few weeks it has: cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook; announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond-buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.
But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. These are: CPFF; PMCCF; TALF; SMCCF; and MSBLP. Quite simply, the Fed isn’t allowed to do any of this.
However, the Fed has run into a problem, which could pose a risk for the markets going forward. The mind-boggling pace of bond purchases quickly hit the limits of what was available to pledge for collateral; or rather, the Fed’s ‘unlimited QE’ may not be so unlimited after all.
Furthermore, with the Death Cross triggering last week, it will put further downside pressure on any bear market advance from current levels.
Given the magnitude, and multiple confirmations, of these signals, it is too soon to assume the bear market is over. This is particularly the case given that the sell-off is less than one month old.
The current bear market and recession are not just the results of the coronavirus shock. It is the result of many simultaneous shocks from economic disruption, surging unemployment, collapsing oil prices, collapsing consumer confidence, and a credit event.
We have farther to go before we can turn the corner.