The US might really take the gloves off against the COVID-19 crisis - April 01, 2020

The US might really take the gloves off against the COVID-19 crisis

The Federal Reserve might go nuclear to battle the effects of the coronavirus pandemic, according to a new report. They might intervene in the stock market to keep it afloat, a step never seen before. Why could this very well help and what do we expect on the longer run? Let’s see!

The United States seems to be prepared to do everything to counter the negative effects of the coronavirus outbreak. How far would they go? According to CNBC’s report, the “Federal Reserve has unleashed what’s frequently been called a bazooka in its efforts to calm markets. Its next step could be to go nuclear”. What does this mean exactly?

The Fed may intervene in the stock markets

The Federal Reserve has already cut back interest rates to zero (like they did during the 2007-8 financial crisis). What’s more, they’re launching an uncapped quantitative easing (QE) program, which is an unseen step on its own. They’re also willing to buy (the most stable) corporate bonds. These are rather serious efforts to keep liquidity up on the markets but it’s just the “bazooka” part of CNBC’s report.

If these steps aren’t enough, they may go further: “Should conditions on Wall Street deteriorate significantly, the central bank could go where it’s never gone before”, writes CNBC. According to the report, several experts believe that the Fed would intervene in the stock market, although not directly, but through buying ETFs. This might be a great solution for the Fed since with ETFs the central bank would be able to track an index (like the S&P 500 or Dow Jones Industrial Average) instead of buying individual stocks.

For this step, the Congress’ support may be needed, but this method is not unknown in the world: Japan and Switzerland already let their central banks buy stocks. What’s more, most countries are battling the coronavirus, and all governments are doing their best to keep the economy on its feet until the end of the crisis. Some of them are doing very similar things as the US.

How does this help?

These steps might not directly help global production but may help the economy on the long run. Our experts believe that sometimes stock markets and reality can “part ways” for a while. Now the goal of the Fed is to keep stock market afloat and show strength. This can soothe people and investors for a while. What’s more, it’s rather hard to imagine that the strict movement restrictions (and home office work methods) can be held up forever. It’s more likely that people will start to get back to their lives after 2-3 months.

If this happens and quarantines end, production will get back to normal just like people do. That means central banks and governments around the world only have to keep things afloat until that time. In 1-2 years, real life production and corporate performance will return, so stock markets and reality can reconnect again. During that time, stock markets can keep slowly going up.

Impossible to predict the future

In a situation like this, it becomes extraordinarily hard to predict the future. What we see for sure is that in reaction to the Fed’s steps the market started its upwards swings. S&P 500 has fallen to $2200 lately, but it recovered 20% to $2500 and $2600. It’s more than possible that these swings will continue. This also means that prices may go even lower down in the near future. We’ve seen movements like these during the 2007-8 financial crisis:

S&P 500 bounces during the financial crisis of 2007-08

Click on the image to see it in full resolution

This very phenomenon seen above can stay with us in the upcoming months, which might be a great time for investors with high risk tolerance to earn some extra profits. For the everyday people, however, jumping in and out of the market is much riskier. The most likely thing to happen – if we can overcome this pandemic – is that in the following years stock market goes up higher, but new swings (with new low points) might happen before that.

During this time, again, discipline and level-headedness might be well-advised.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.