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Will Enough Be Enough?

Updated: Jul 20, 2023

What the Fed did last week was simply spectacular. They sent a siren blast of a message to businesses large and small and basically said that they’re going to use any means necessary to prevent a depression and that they’re going to err in favor of giving businesses credit.

Tony Dwyer of Canaccord Genuity explained it very well when he cited the HYG index. HYG is an index of high yield bonds, and it was up four points last Thursday. It had been so heavily shorted, and it's up to 81 now (from 68 a few weeks ago). Dwyer noted that, in light of Thursday's 6.6% share price gain on the bond ETF in response to the stimulus plan, "The other two times the HYG saw greater than Friday's 6.6% ramp [market was closed Friday] did not represent "the" low in the market."

In late 2008, HYG had an up day of more than 7%. The S&P 500 fell 37% from that level to its bear market low before the bull run of the past 11 years began. Later in 2008, HYG had a 12% up day, which preceded 30% of lost value on the benchmark index before the great bull run.

The market seemed to really like what the Fed's action meant for less-than-investment-grade companies, and took HYG up big. Today, it's starting to look a little more like what Dwyer was describing.

As if doing it to just prove his point, AMC Entertainment (AMC), the nation’s largest operator of movie theaters, filed for bankruptcy yesterday. Even after the Fed shouts from the mountaintop that they will support everybody-- including high yield bond issuers like AMC-- I expect we’re going to see a lot more of these. And it’s not as if employees just work through Chapter 11 and the company emerges out of bankruptcy and everybody’s fine. That’s not how it works; there are virtually zero corporate bankruptcies that aren’t accompanied by a plan to lay off workers for the reemergence. Therefore, we expect this to be a painful quarter for Main Street.

Governments and central banks around the world are betting that one big set of relief measures will address the disruption caused by Covid-19, but we can only hope that they’re right. It may not be enough if we see a new wave of infections and the pursuant bankruptcies. Interestingly enough, though, the Fed’s ability to do more really won’t be limited by its balance sheet. Rather, it may be limited by a political backlash that has already started due to the enormous amount of stimulus already involved, including last Thursday’s $2.4 trillion additional package-- there’s a view that it is doing way too much for Wall Street and way too little for Main Street.

Main Street already feels like they’ve been wiped out and, in many households, they have. Our government forced Main Street to shut down, and there's a strong national sentiment that it now has a responsibility-- a moral imperative-- to hold together this economy so that those 150 million people can resume their lives as quickly as possible. At this juncture, it's up to the government to prevent another 15 million people from losing their jobs.

As Goldman Sachs Chief Equity Strategist David Kostin wrote in a note issued yesterday, U.S. stocks are unlikely to make fresh lows thanks to the “do whatever it takes” approach of policy makers. A combination of unprecedented policy support and a flattening viral curve has “dramatically” cut risks to both markets and the American economy. But that doesn’t mean we’re going to have a V-shaped recovery, either, and if the U.S. has a second surge in infections after the economy reopens, all bets are off, according to Kostin or just about anybody else we talk to.

Given the magnitude of the bets the world’s central banks are making, we’d better hope that doesn’t happen.

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