Fed Liquidity Drives Thursday’s Up-Market

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Stocks rose Thursday as recessionary economic data rolled in. The market is well aware the data will be rough and is taking solace in the multiple forms liquidity it expects to create a sharp recovery at the other end of the coronavirus pandemic. 

All three major U.S. indices rose Thursday, with the S&P 500 up 2%. The benchmark index is now up 25% from its 2020 low and, momentarily, out of bear market territory. 

"The mood in markets continues to improve but it’s patchy,” wrote Jasper Lawler, head of research at London Capital Group in emailed remarks to reporters. 

Contrary to Wednesday, stocks were rising on liquidity and lower rates, rather than being part of a classic risk-on market. Stocks moved higher despite jobless claims in the past week hitting 6.6 million, economists saying unemployment will be in the mid-teens in percentage terms, and Starbucks  (SBUX) - Get Report now expects 32 cents rather than 34 in earnings per share for the quarter.

That’s because the Federal Reserve said it will extend $2.3 trillion in lending to small businesses and households, done through the central banks’ special purpose vehicles, or funds. That’s added on to hundreds of billions previously lent and $350 billion appropriated by Congress. And market participants also expect trillions more to be allowed for by Congress, which would include more money for small businesses, which are rapidly going under water. 

"There is a growing realization among U.S. policymakers that the $350 billion allotted for the paycheck protection program (PPP) is insufficient given the cash flow shortfall that small businesses face,” wrote Lauren Goodwin, Economist and Multi-Asset Strategist at New York Life Investments in emailed remarks to reporters.

"So far, the loans processed cover payroll for fewer than 7 million employees, or less than 10% of all small business employees. At the current pace of loan processing ($68 billion so far), banks and the Small Business Administration will have used up the full program allotment by April 23, just 12 business days from now.” 

Also demonstrating the added liquidity are the share prices of two bond ETFs. The share price of the iShares iBoxx Investment Grade Corporate Bond ETF  (LQD) - Get Report is up 3% Thursday, signifying the market is giving more credit to corporations, which can enjoy lower borrowing rates. The iShares iBoxx High Yield Corporate Bond ETF  (HYG) - Get Report is seeing its share price rise 8%, an important indicator for companies with credit rated as junk. 

While the market is growing confident that liquidity can create a sharp economic rebound post-pandemic, there may be volatility ahead in the near-term. 

“A rally doesn’t mean we’re out of the woods just yet nor that volatility is a thing of the past,” wrote Mike Loewengart, head of investment strategy at E*Trade to reporters. “Optimism can wear off quickly if cases climb or stay-at-home orders are extended. The uncertainty of the pandemic continues to hang heavily on hearts and minds.” 

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