One of the oldest sayings on Wall Street is “Don’t fight the Fed.” Typically, this refers to when the Federal Reserve lowers interest rates with the intention of stimulating economic activity. If it works, the economy will grow, in turn companies will grow, and eventually stock market valuations will rise. This is the theory and thus why investors will at the very least, mutter to themselves, “remember, don’t fight the Fed.”
This time around, the Fed is doing more than just lowering interest rates… they are throwing their entire weight behind keeping businesses afloat while many have been unceremoniously shut down. In less than two months, the Fed has done the following (at least announced the following):
· Cut interest rates to ZERO,
· Launched quantitative easing (QE4) of $700 billion,
· Providing funding of up to $300 billion to small businesses,
· Offering liquidity facilities of $500 billion to municipalities,
· Working on providing $2.3 trillion in loans.
By providing trillions of dollars in support, it is clear that the Fed is serious in doing their part to help people bridge the gap until the Country is opened up again. But, how should we read this? Why so much, so quick?
Quite frankly, it’s refreshing to see a Government organization try to get ahead of a crisis. The economic portion of this crisis is straightforward. The majority of businesses/organizations were told to radically change how they do business… if not, close. A good percentage of individuals were told, in one way or another, stop going to work. Prior to this, while the economic expansion was getting long in the tooth, it was still growing. So, in essence, we stopped demand while short circuiting supply… A double whammy!
The Fed has taken the approach to do all it can (hopefully Congress continues to follow its lead) to make people as whole as possible during the economic closure. Getting in front of it, rather than waiting till after the fact. There will be carnage, but the Fed’s actions will help minimize it. The longer this goes on, the worse this economy will be… but it will be “less bad” because of the Fed.
Ultimately, in the very short run, the “this time it’s different” crowd (which seems larger than life these days) may be proven correct as the reality of closing down your economy for even just a few months may send us into a deep short recession. But, over a longer period of time, investors may be wise to heed the old adage… “don’t fight the Fed.”
Note: Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities.