Pro Perspectives 3/27/20

March 27, 2020

As we’ve discussed, here in my daily Pro Perspectives notes, historically major turning points in markets are associated with some sort of intervention.  And markets can turn well before there is clarity on the outcome (the coronavirus, in this case).  

We now have the nuclear bomb of intervention.  Both the Fed and the government are in ‘whatever it takes’ mode.  Government aid has already surpassed $3 trillion, with more to come.  And the Fed expanded it's balance sheet by a trillion dollars in a week, with more to come. 

With that from yesterday's highs to Monday's lows, the S&P 500 had jumped 20%.  But at down 35% (the max drawdown in stocks to this point), we will need a 54% gain to return to the February highs. 

As we end the week, let's take a look at the most important chart of the week, U.S. yields.  

Remember, we talked about this last week, as the most important market in the world. 

As the Fed cut rates to zero and launched QE, money should have moved IN to the Treasury market, pushing market rates on the 10-year government bond down, toward zero.  Instead, rates went into reverse and ran up as high as 1.30%.  That was a flashing emergency signal that there was serious trouble in the bond market.  And that became the battle ground for the Fed. 

But as we discussed, it's a battle that they have the tools to win.  They have the printing press.  They can buy as many Treasuries as they need to, to push yields back down.  And that's what they did.  The Fed fixed the bond market this week, by become a buyer of corporate bonds, municipal bonds and an unlimited buyer of Treasuries.

As you can see in the chart above, the 10-year yield closed today at 68 basis points.  So, financial markets seem to be function properly now. 

Global policymakers have thrown the kitchen sink at the crisis, all vowing to do 'whatever it takes.'  The bottom should be in for stocks, unless there is an uglier negative surprise (on the health crisis front) than anyone, at this stage, could imagine (i.e. another black swan). 

And as discussed yesterday, we have the chance to see a positive surprise on the health crisis front as early as Monday, as we should start hearing reports out of New York on the performance of Hydroxychloroquine, a treatment option for Covid-19 — the use of which began in New York hospitals this past week.