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Never Fight the Fed

There is a saying among traders and investors when it comes to the Federal Reserve of the United States (Fed). “Never to fight it. And, for a good reason. 

The Fed is the most proactive central bank in the world. It acts as the leader in central banking and sets the monetary policy for the world’s largest economy. Also, it sets the interest rate for the world’s reserve currency – viewed by many as a privilege rather than a burden.

Once again, the Fed’s actions proved to be decisive. Right at the start of the coronavirus crisis, when the stock market plunged, triggering the circuit breakers, the Fed intervened. It did it so quickly and decisively that the bear market lasted…1.1 months. Yes, that is correct – the shortest bear market in history took place in the times of the largest exogenous shock seen since the second world war.

Trading the 2020 Stock Market

2020 has been a crazy year so far. The pandemic brought changes in consumer behavior, and risk perceptions change too.

A bearish market forms when the price retraces more than twenty-percent from the highs. Or the market enters a bullish market when it bounces more than twenty percent from the lows. This definition of boom and bust cycles governed Wall Street investing for ages. In a way, it is a simple reminder where you are compared with the business cycle.

This year marked the fastest drop from a bullish to a bearish market in history. What followed next was the shortest bear market in history. More precisely, the bounce back was equally strong.

The Fed is credited with much of the actions that led to such market performance. But the fiscal stimulus delivered by the Congress helped too.

Investors poured into the stock market, buying even bankrupt companies like Hertz. Speaking of bankruptcy, in the United States, there are two types of bankruptcies – reorganization and liquidation. Filing for bankruptcy under Chapter 11 allows a company to come back after a while and continue as a going concern. Hence, traders speculating on Hertz’s shares were not that out of this world when the company filed for Chapter 11 protection.

Coming back to the Fed and the stock market, its actions, and decisions were enough to restore trust. When the Fed moves, investors listen.

Never fight the Fed.

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