Why Markets Keep Ignoring the Fed

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Monday has been another day that the Federal Reserve has announced more liquidity injection measures and that the stock market continued to fall. 

That has been a theme during the coronavirus-Induced bear market and likely recession. But the concerns around the virus, the economy and all the stimulus have evolved and deepened. 

Monday, the Fed said it will not only provide trillions of dollars of cash injection into various parts of the bond market to keep cash flowing and interest rats low, but that it will do so for as long as it has to. The S&P 500 fell as much as 3% Monday, before settling to a 1% loss by midday. And the index is down 27% since March 4, when the Fed first began intervening in an ailing economy. 

At first, the market quickly recognized that no matter how added money is stuffed into the pockets of Americans and into the bank accounts of businesses, borrowing and spending won't pick up until the coronavirus ends, as people stay home, afraid of contacting the illness.

Investors were happy to see the Fed step in and many said the up move in stocks and high yield bond prices will be as violent as the down move has been, once this is all over. 

But there are more concerns now. The v-shaped economic recovery in the second half of 2020 may not be so, as the virus is here indefinitely, causing massive uncertainty. That's a sharp recovery. 

"I think you have more of an L shaped recovery — that almost has to be the base case," Steve Friedman, senior macroeconomist at MacKay Shields Global Fixed Income Team told TheStreet. Friedman worked on the trading and open market operations for the Federal Reserve through the 2008 financial crisis. That's because the economy, likely deep into contraction territory, is unlikely to go back to business as usual when the virus ends, as the disease may be here for a long time, causing lasting effects. 

Here are all of Friedman's concerns:

"What markets need is not only a sense of how the virus will evolve, but what’s the medium to longer term from the government in terms of getting people back to work. That's going to have a huge impact over whether businesses can stay in business. The supply side gets hit. Business can’t function anymore. And we don’t know what impact this will have on consumer behavior once this is all over." 

The market recognizes that the Fed has to keep business and households liquid, but if the virus goes on for a long time, it will still threaten to drain cash from people and businesses. 

Seema Shah, chief strategist at Principal Global Investors wrote in emailed remarks to reporters that the Fed's stimulus "is another essential step forward in providing a floor for risk markets but, unfortunately, it is not sufficient.” 

Shah added:

"While central bank and fiscal action is absolutely crucial, the key requirement to stop the market rout is investors believing the virus is behind us. Until that happens, central bank and fiscal action will quickly become out-dated, requiring policymakers to repeatedly re-visit and multiply their stimulus plans.”

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