A maxim to trade by

Trying to learn lessons from the recent recovery in global stocks seems to be encapsulated by this maxim, never bet against the Fed. It seems fair enough too.

Each time there has been a resurgence in virus cases the impact does not seem to last for long. In a way that is not surprising. There is a plethora of drug companies working towards a treatment or cure of COVID-19, so the market is expecting one of those avenues to produce the goods. A vaccine by year end/early 2021 seems to be the pricing.

Central banks and Governments keep the gravy train running

The mantra around the world seems to be 'whatever it takes' to support economies. It is reasonable to assume that there will be plenty of liquidity available for companies in the near to medium term future. The basic playbook is that the virus is a one off event, so it is reasonable to add to countries debt levels in order to provide support through this tough time. QE, fiscal stimulus, and even negative interest rates are potentially on the cards to aid the fight. A fight it is. Whatever the rights and wrongs of recent monetary policy it is hard to just watch companies and individuals sink. There is also a vested interest for lawmakers to prevent an economic collapse, as a broken economy will lead to a change in the social order. That change, as history tells us, is nearly always a violent one.

A maxim to trade by

Read here a quote from Vox from a piece in their the political aftermath of financial crises: Going to extremes. It is worth quoting in full:

The typical political reaction to financial crises is as follows: votes for far-right parties increase strongly, government majorities shrink, the fractionalisation of parliaments rises and the overall number of parties represented in parliament jumps. These developments likely hinder crisis resolution and contribute to political gridlock. The resulting policy uncertainty may contribute to the much-debated slow economic recoveries from financial crises.
In the light of modern history, political radicalisation, declining government majorities and increasing street protests appear to be the hallmark of financial crises. As a consequence, regulators and central bankers carry a big responsibility for political stability when overseeing financial markets. Preventing financial crises also means reducing the probability of a political disaster.

A medium term bullish picture?

This means that any pullbacks in equity markets are once again opportunities to buy. Second virus waves will be met by fresh stimulus hopes and everything will keep moving forward. We may well see some selling into quarter, month, and half year end today and tomorrow, but eventually medium term dip buyers will be coming back in.

So, 'never bet against the Fed'. Likely to be a great maxim to trade by for the medium term future. See here for some key support areas in the S&P500 where we would expect medium term buyers to step in.

A maxim to trade by