Jul 6, 2020 - Economy & Business

Consensus grows about the Fed's impact on equities

Data: Federal Reserve; Chart: Axios Visuals
Data: Federal Reserve; Chart: Axios Visuals

Minutes from June's meeting of Fed policymakers was released on Wednesday and showed the central bank is still ready to provide support "for some time" to markets.

Why it matters: With coronavirus cases rising, recent economic data largely moving backwards, and companies' earnings and revenue guidance slipping, the Fed looks to be the driving force behind the march upwards of stock prices.

By the numbers: From February to the end of June, total assets held by the three major central banks (ECB, Fed, BOJ) soared $5.6 trillion to a record $20.1 trillion — with the Fed now holding over $7 trillion, data from Yardeni Research show.

What they're saying: The Fed is using "financial engineering, in a highly levered manner, to indirectly influence equity prices," Vineer Bhansali, CIO of LongTail Alpha, writes for Forbes.

  • “As long as the Fed has the authority to buy assets, print money, and underwrite risk taking, as it currently has, don’t fight the Fed. But be ready to bail out as soon as they start thinking about thinking about raising rates.”

One level deeper: “Today the economy and the markets are driven by the central banks and the coordination with the central government,” Bridgewater Associates founder Ray Dalio said at the Bloomberg Global Asset Owners Forum Thursday.

  • As a result, “capital markets are not free markets allocating resources in traditional ways.”

The big picture: Value metrics like P/E ratios must be re-evaluated in light of the current situation, Ed Yardeni, president and chief investment strategist of Yardeni Research, writes in a note to clients.

  • "What should the forward P/E of the S&P 500 be when the federal funds rate is zero, the 10-year US Treasury bond yield is below 1.00%, and the Fed is providing plenty of liquidity to facilitate the resulting rebalancing from bonds to stocks?"
  • "Frankly, we don’t know the answer to this question, since there is no precedent for the current situation."
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