The easing of the lockdown has resulted in a huge spike up of infections and a corresponding spike down in stock prices. Equities closed down about -3% on average and are now mostly down over the last month.
Stepping back and looking at the big picture here is what we see. Both the Fed and Capitol Hill have handed out trillions of dollars over the last few months to stabilize the impact of the lockdown. Furthermore, the U.S. Central Bank is now directly buying distressed debt and equities for the first time ever, hampering market forces. Also, The Federal Reserve voted this week to neuter the Volcker Rule which was enacted to prevent wacky speculation with your money by banks to prevent another financial meltdown like 2008. Markets responded to the historic injection, but the jury is out on when the real economy will come back or what will happen to the dollar and inflation. Stagflation is now likely coming to a theater near you.
Even more perplexing is that the Fed voted to support rolling back the Volcker Rule reforms, then in the same week also decided to limit Banks buying back their shares or issuing dividends because their balance sheets look like crap. Is the Fed’s next step outlawing selling of stock?
This Past Week’s Highlights:
- Risk gauges remain in risk-off mode and weakening
- All key U.S. equity benchmarks closed under important short term daily moving averages and hanging onto important weekly ma’s
- Emerging Markets outperformed US stocks (breaking out on a weekly basis) but still closed under its 200 DMA (EEM)
- Financials look terrible despite the relaxing of the Volcker Rules (XLF)
- Safety plays such as Bonds and Gold bucked the selloff (TLT), (GLD)
- Utilities moved into a bear phase (who needs power) (XLU)
- There could be a Double Top forming in (SMH)
Finally, Current US business debt is double what it was in 1970, a few years before commodities exploded, so it is not surprising gold is close to 2000 per ounce and all-time highs and leading almost all other asset classes over the past year. This is something central banks will try to keep a lid on because if gold breaches this level, Central Banks will be perceived to be out of control. Regarding stocks, let’s not forget that the Fed and or Capitol Hill can drop another few trillion on us and we could have a parabolic blow off.
