In the midst of the countdown to Armageddon in March the Fed decided it was time to go nuclear on the markets. That singular event is going to drive market performance for the remainder of 2020.
Almost daily in recent weeks, the Fed is announcing new unprecedented measures meant to get the wheels of the future economy greased to the maximum extent while mitigating the negative consequences faced in the current economy.
This is a substantial development that it seems is being ignored by the disproportionately large contingent of skeptics out there. Let's be clear about exactly what the Fed has done here: In the span of the a few weeks they have injected the economy with enough liquidity to arrest the equity market decline. At the very same time, massive monetary stimulus with fiscal stimulus that will be felt down the road act as rocket fuel for the economy during Q3 & Q4 once the developed world returns to some semblance of its former self.
Pillar by pillar the foundation supporting every bearish argument that preceded Fed actions has been vaporized through aggressive monetary policy. The remaining pillars of the bearish argument are based on current data, which, while being atrocious, has more than been factored in by a historic decline in equities during February and March.
This is exactly why a retest of the current lows not only won't occur, but the mere suggestion of it is reason to perpetually ignore any analyst, trader or individual who makes that claim. It displays a complete misunderstanding of the current nature of the market. It says that record stimulus will have negative consequences. It says that the markets are backwards looking instead of discounting future developments.
Popular wisdom says that calamities such as the one we are currently in the midst of create dynamics that are impossible to judge accurately due to all of the variables involved. While this may seem like a logical conclusion, the illogical nature of the markets, in fact, create an extraordinarily simple investment equation during seemingly impossible to judge events.
What periods of severe distress accomplish is to remove nearly every variable that previously mattered to investors. For example, earnings, economic numbers, geopolitical events not related to the crisis. All of these variables that previously would have caused a logical reaction in the markets, no longer accomplish much of anything other than to confuse investors. Witness the scratching of the head by the masses to recent market action in light of the economic data to highlight the most recent example.
This is due to the fact that the investment equation from this point forward comes down to one single binary question. Investors that get the answer to this question are buying hand over fist. Investors that don't get it are sitting out or short the markets here. Will the Fed succeed over the next 6-9 months? This question has already been answered by the market, but so many are caught up in the noise of day to day events that they can't see it.
And this is the reason that the current market is extraordinarily more simple that anyone would have you believe. By answering yes or no to this question, you take out all the other variables that exist, allowing for a position to be taken with conviction moving forward.
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