Millions of American jobs have been lost in the last two months following the onset of COVID-19 and the intentional economic shutdown to stem the pandemic. Of course, the tough times are global too. For the US, one group has been hard at work – the Fed. 

There has been a tremendous monetary policy response to COVID-19. Each time a pundit has uttered those infamous words, “the Fed is out of bullets”, we seem to get another huge piece of stimulus.

It has been a fascinating time since the Great Financial Crisis. The US Federal Reserve took on a massive quantitative easing program but then enacted a brief tightening cycle.  It was late 2015 when the Fed began hiking rates and not until December 2018 when the Fed Funds Target Policy Rate topped out in the 2.25-2.50% range. 

Topdown Charts closely monitors the global monetary policy situation. We focus on macro analysis to arrive at investment conclusions. Following the 2008-2009 recession, a general tightening cycle took place followed by some banks easing with others tightening, seen in the charts below. 2018 was interesting in that it was just about the only stretch that featured pervasive interest rate hikes.

(Click on image to enlarge)

The above charts come from the April edition of the Market Cycle Guidebook.

Jay Powell and his team at the Fed has been busy. Consider all of the measures: taking rates to zero, issuing very lenient forward guidance, open-ended securities purchases (QE), lending to companies, backing money market funds, and expanding the repo market to improve liquidity. They even stepped out and began direct lending to banks, large corporations, and even smaller businesses. I can keep going – they now support muni bonds and high-yield debt across the US credit market. The list goes on. Out of bullets? Chairman Powell may consider that a dare, so be careful.

Sure it’s interesting to study monetary policy during strenuous economic times, but what does it all mean from an investing point of view? Considering all of the massive programs announced since early March that have sent the US Fed’s balance sheet to new records, the US Dollar is rather flat.

The USD tends to rally during economic crisis due to its ‘safe-haven’ nature. But when panic eases, that’s when we get the tell on where the Dollar may be trending. So what’s happened since late February when the pandemic became center stage?

Late February and early March was the classic ‘sell everything’ mindset as even many ‘flight to quality’ assets were seen as sources from which to raise cash. The US Dollar was no exception, dropping from near 100 to just under 95. It was not until mid-March when the USD rocketed to multi-year highs at 104, coinciding with the low in equities. But the last 6 weeks has been a choppy, narrow-range on the DXY between 98 and 101. The next move is critical. For perspective, the 2002 high in the DXY was 120 while the 2008 low was near 72. So a lot can happen.

And what’s been happening with gold? It has moved to the highest levels since 2012 above $1,700 but retreated from nearly $1,800 a few weeks ago.

We are bullish commodities and international markets, and a weaker dollar is generally a tailwind for those areas. Being macro investors, we take seriously what policy decisions central banks make, but more importantly, how those decisions affect asset classes. Intermarket analysis plays a critical role – the analysis of how stocks, bonds, commodities & currencies interact.

Investors are impacted by recent history. This recession rekindles memories of the 2008-09 period. So what took place following the worst of 08-09? Commodities had a strong run of it from the summer of 2009 through Q3 2011. Gold rose from $700 to $1700 and oil climbed from $50 to $115. The Dollar ranged between 73 and 89. Non-US stocks did well versus US equities briefly as well. 

I said it was short-lived. Q4 2011 and beyond was an abysmal period for commodities in absolute terms and for non-US stocks on a relative basis.

Here’s the point – we pay close attention to what central banks are doing because it impacts how currencies & commodities trade, and has a crucial impact on the broader financial, business, and market cycles that drive active asset allocation decisions.