Pro Perspectives 3/25/20

March 25, 2020

As Congress continues to move toward a formal approval on a $2 trillion economic relief package, stocks continued to climb today. 

That shouldn't be too surprising.  Remember, as we've discussed in recent days, both the Fed and the U.S. government (through stimulus) are becoming stakeholders in the stock market.  The Fed, through corporate bond ETFs.  And the government, likely through equity stakes (or options on equity) in airlines. 

Speaking of the Fed's influence on stocks:  Let's revisit what Ben Bernanke – former Fed Chair, and the architect of the Fed's emergency policy response to the Global Financial Crisis – said about QE and stocks

When the Fed announced QE2 in late 2010, Bernanke penned a column for the Washington Post, titled, Aiding the Economy:  What the Fed Did and Why

In it, he wrote this about QE1:  "This approach eased financial conditions … Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." 

In short, as Bernanke acknowledged in the above, and more explicitly as he continued doing lengthy interviews to answer critics of QE, QE tends to make stocks go up – which is an intended consequence. 

Now, we heard from Bernanke last week, in an op-ed that he and Janet Yellen penned for the Financial Times, where they recommended that the Fed buy corporate bonds (a market that was becoming very ugly and threatening to financial stability).  
The corporate bond market bottomed a day after.  And the Fed complied on Monday, announcing they would buy corporate bonds. 

On Monday afternoon, we looked at the corporate bond ETF, LQD, as an easy way to follow the Fed tsunami.  Here's an updated look at the chart. It has already retraced 70% of the decline.  

Staying with the Bernanke theme today.  We heard from him again this morning, in an interview on CNBC.  We he speaks, it's a good idea to listen.  As a well-respected expert on the Great Depression, he was asked how this current situations compares? 
The good news:  He said it didn't. 
He compared it to a natural disaster.  That said, he agreed with the policy measures taken (monetary and fiscal), but emphasized the importance of executing on the health care strategy (slow the spread, identify treatments, find a vaccine).  Assuming that the threat begins to clear in the summer months, he was optimistic on an economic bounce back.