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Market Update

Market Update

April 20, 2020

No Non Sense News

Today is Monday, April 20 and it is 6 AM.

Friday we saw a continuation of the rally off the recent market lows. The current bounce appears more and more like a V bottom.

As I mentioned many updates ago, V bottoms have become more of the norm given the growing intervention of the Federal Reserve. The most recent intervention is unprecedented. The old saying, “Don’t fight the Fed” applies more today than ever. The Fed has made it clear that they will do “whatever it takes” to stabilize asset prices through the many different purchasing facilities that they have recently set up. This steady purchase demand by the Fed will act to stabilize and slowly push up prices for many different asset classes. This is simple supply and demand theory in action. The Fed is creating incredible demand and absorbing any excess supply which translates into higher prices.  

Back in 2000 when I navigated the dot com bubble and bust, Fed accommodation was virtually non-existent. At this time, W style bottoms were much more the norm. In the absence of Fed intervention, the most likely bottoming process was establish a bottom, rally and then retest that bottom.

But today not only do you have government fiscal and Fed monetary stimulus, but you also have ECB and The Central Bank of Japan, also stimulating. It is my belief that a consider amount of this seeming non-stop money printing (virtually unlimited QE) is finding its way into our stock market. This makes the probability of a V style bottom much greater. 

The other little know fact is that the Fed started a new program to provide dollars to Foreign Central Banks and calm the $5 Trillion currency market. This Repurchase facility (Repo) opened April 6 and allows foreign central banks to swap US Government bonds for dollars. This will allow for the smooth functioning of the US Treasury market by providing a temporary source of US dollars other than through the sale of US Government securities in the open market. This directly addresses the global dollar shortage.

Lastly, more data appears to indicate that the worst of the pandemic in the US may have already peaked. If this is the case, it is another reason why I don’t see a retest of the old low in the cards.

As always, call with any questions. 407-248-9647.

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