MacroView: Will The The Market Repeat The Start Of 2018?

“Don’t fight the Fed”

That is the current mantra of the market as we begin 2020, and it certainly seems to be the right call. Over the last few months, the Federal Reserve has continued its “QE-Not QE” operations, which has dramatically expanded its balance sheet. Many argue, rightly, the current monetary interventions by the Fed are technically “Not QE” because they are purchasing Treasury Bills rather than longer-term Treasury Notes.

However, “Mr. Market” doesn’t see it that way. As the old saying goes, “if it looks, walks, and quacks like a duck…it’s a duck.” 

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Those liquidity flows most notably have been chasing the largest of large caps – namely Apple (AAPL) and Microsoft (MSFT). As Ed Dowd noted, there are many similarities between now and the last time the Fed was fighting a perceived liquidity shortage before the “turn of the century” over concerns of “Y2K.”

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But here is what jumped out at me.

Going back to 2016, as the world faced a “Brexit” crisis, the Fed, ECB, and the BOE all joined forces to provide liquidity to the markets. Then, just before the 2016 election, as the world was concerned a “Trump Election” would crash the market, the Fed provided a huge boost of liquidity. All along the way, each dip in the market was met by liquidity support.

Currently, we are being told there is “nothing to worry about” with respect to the financial system. Maybe, but the amount of liquidity being injected dwarfs all previous injections by massive proportions.

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You can see the issue more clearly looking at a rolling 4-week change to the Federal Reserve’s balance sheet.

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So, despite commentary to the contrary, there are only two conclusions to draw from the data:

  1. There is something functionally “broken” in the financial system which is requiring massive injections of liquidity to try and rectify, and;
  2. The surge in liquidity, whether you want to call it a “duck,” or not, is finding its way into the equity markets.

January 2018 Redux

“The exuberance that surrounded the markets going into the end of last year, as fund managers ramped up allocations for end of the year reporting, spilled over into the start of the new with S&P hitting new record highs.

Of course, this is just a continuation of the advance that has been ongoing since the Trump election. The difference this time is the extreme push into 3-standard deviation territory above the moving average which is concerning.” – Real Investment Report Jan, 5th 2018

At the beginning of 2018, following the passage of “tax reform,” the market was pushing 3-standard deviations of the 50-dma. It eventually pushed 3-standard deviations above the 200-dma before it came crashing back to earth. The second time it pushed the same deviation was in October of 2018, which was again followed by a marked decline.

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Moon Kil Woong 3 months ago Contributor's comment

We are looking at an election year and a year following after. The general trend tends to be no major crash in election years which is why I think the outlook seems positive. With low inflation, the threat of a major oil shock from a mid-east war is also more subdued than one may expect.

Although anything can happen, this year is favored to be on the bulls side regardless of who wins the election.

Texan Hunter 3 months ago Member's comment

People are always stoking fears claiming that there will be a war in the Mid East. Personally, I think those fears are overblown. Despite all their posturing, Iran knows they would get wiped out with Trump in charge.