Stocks Surge Tuesday — Is Fed Stimulus Working?

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Stocks shot higher Tuesday, a day after the all-important $2 trillion fiscal spending plan that heavily focuses on coronavirus aid failed for the second time. Many on Wall Street say the Federal Reserve’s stimulus actions are beginning to take hold. 

All three major U.S. indexes rose at least more 5%, with the S&P 500 up 6.3% and the Dow Jones Industrial Average up more than 7%. 

This comes after the second consecutive day (Monday) that Congress couldn’t pass the all-important $2 trillion fiscal stimulus bill that would heavily center on spend for coronavirus relief. No matter what the Federal Reserve does, the most important ingredient to the end of a recession and bear market is the end of the virus. 

And that’s what the market is grappling with. Wall Street has made it clear Tuesday that stocks are going higher because the Federal Reserve’s stimulative measures are indeed a boost to economic and market conditions. 

"The Federal Reserve kitchen sinking has gone some way to calm markets,” wrote Jasper Lawler, head of research at London Capital Group in emailed remarks to reporters. "For us there were three standout measures were Number 1: Open ended QE, which means the Fed will just keep buying as they see fit with no restraint. Number 2: Lending directly to businesses completely bypassing high street banks in the process. Number 3: Corporate bond buying where the Fed can even buy corporate bond ETFs in the stock market.”

Prior to Tuesday, Wall Street had said lower interest rates and injected cash into households and businesses couldn’t be useful until the virus ends, as money won’t be spent until people feel safe to be out and about. But now the market seems to be recognizing that, while spend may not fully pick-up in the short-term, the parties that need to stay solvent are doing just that at least for the moment. Plus, the Fed’s unleashing of trillions of dollars into the investment grade corporate bond market and treasury market is beginning to bring yields down, lowering the cost of capital for borrowers, making equities more attractive. 

That’s beginning to become apparent in the bond market, according to one wealth manager. 

"In response to the Fed’s announcements, liquidity improved today,” wrote Lauren Goodwin, economist and multi-asset portfolio strategist at New York Life Investments on Monday early evening in emailed remarks to reporters. Our partners across the New York Life Investments platform reported better trading conditions in investment grade fixed income compared to those experienced in the last two weeks. Higher investment appetite for investment grade issuance, declining discounts to net asset value are all potentially short-lived signs of improvement.” 

Higher prices of these corporate bonds means investors have stronger conviction in corporate creditworthiness, making it more likely that more money will flow through to the bottom line for shareholders and that these companies are staying afloat for the time being. The lowered interest rates also make stocks more attractive. And investors' purchase price of shares in bond funds closer to the funds' net asset values is another indicator of higher credit confidence. 

Still of note, the Fed hasn’t bought high yield bonds. 

Also, added liquidity in general will tide the economy over until in needs more from the Fed if the virus isn’t soon contained. The Fed may print money to provide more liquidity. 

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