Buy When the Fed Is Buying Won’t Work Anymore
The recent rebound in stocks was built on false hopes about the economy and efforts to stem the pandemic.
The stock market is technically in a bull market.
Photographer: Bloomberg
The S&P 500 Index has rallied 28% from its low this year on March 23, with Wall Street praising the Federal Reserve for basically creating money to purchase a broad range of securities, effectively supporting asset prices. So now, many believe the bear market that saw the S&P 500 plunge 34% over the course of five weeks starting in late February is over and that major stock indexes will not revisit their recent lows. Don’t count on it.
The basis for the optimistic outlook is based on three ideas, starting with “you can’t go wrong co-investing with the Fed.” The central bank on March 22 announced what is probably the most aggressive set of moves in its 106-year history. They included a reduction in the target federal funds interest rate by 1 percentage point to zero as well as numerous liquidity facilities to support various parts of the financial market. If the Fed, with its nearly unlimited ability to print money, is buying, how could prices ever go down? That notion alone was reason enough for investors to buy.