Home > Dramatic Move Lower in Stocks After Fed’s Message

Dramatic Move Lower in Stocks After Fed’s Message

June 12, 2020 By Mircea Vasiu

On Wednesday, the Federal Reserve of the United States (Fed) left the monetary policy unchanged. It considered it appropriate for the current economic stance and signaled further stimulus down the road, should it be necessary. 

Up until Wednesday’s FOMC Statement and press conference, the stock market recovered almost all the coronavirus-related losses. Moreover, some indices (e.g., Nasdaq), printed new all-time highs.

It all changed yesterday.

Dovish Message from the Fed

The focus on this week’s Fed message was on the members’ views regarding projected policy rates. The message was clear – policy rates near 0% until the end of 2022. Under normal conditions, this is enough to sustain a stock market rally.

Only this time, the market did not like the message. The Fed projections also showed a 5% unemployment rate in 2022 – an optimistic scenario, but the initial jobless claims and continuing claims released right before the cash opening on Thursday showed the Fed projections are disconnected from the labor market’s reality.

More precisely, the continuing claims number of 20.9 million puts a big question mark on the 13.3% unemployment rate we saw last Friday. Or, this is just the positive data highlighted by Fed’s Powell in Wednesday’s press conference, albeit he admitted that the road to recovery is full of uncertainty.

What is clear now is that the economic recovery could take  any shape, besides a V.

Another thing that spells trouble for the stock market is the huge difference between the government’s needs and what the central bank delivers. One of the roles of a central bank is to act as the government’s banker, and May revealed a stunning $760 billion increase in borrowing. During May, investors saw the second-largest net issuance of Treasuries in history.

The problem with it is that the borrowing dwarfs the size of the Fed’s stimulus by roughly $300 billion. In other words, the monthly change in Fed’s assets minus government borrowing for May 2020 is a negative $300 billion – bearish for stocks altogether.

To complete the perfect storm for the stock market, the US oil inventory levels rose on Thursdays to historic levels. It shows that economic recovery lacks momentum and points to new fiscal and monetary stimulus ahead.

While Powell left the door open for a further stimulus, meaning that the Congress will likely do the same, the market wanted something concrete. The Fed may have to step up to the challenges once again.

Tags:
Fed