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Can the Market Have It Both Ways?


Chief Strategist at Interactive Brokers

Today we were greeted with a higher market based on actual good news – a successful step toward a potential Covid-19 vaccine from Moderna (MRNA). It is indisputable that a vaccine would be the most important step towards a return to normalcy, and a wide range of risk-based assets rallied in response. To put things into perspective, the test results were based on only 8 people. That means that further rounds of testing will be required before approval and full production can begin. Unfortunately, we still may be 12-18 months away from the point when a large percentage of the population can be immunized. Yet markets are hungry for good news on the virus front, and they got some today.

Markets received the equivalent of a long straddle this morning – a call on the virus front and a reissue of the Fed put.

The vaccine news was released at 7:30AM Eastern time, causing S&P500 Mini futures (ES) to spike over 1% almost immediately. Considering that the S&P500 Index (SPX) opened over 2% higher, it means we were already up over 1% before the MRNA news. The reason for that was the market’s usual go-to catalyst – positive rumblings from the Federal Reserve.

Federal Reserve Chairman Jerome Powell was featured on “60 Minutes” last night in a segment that aired from roughly 7:05-7:20PM Eastern time. Interestingly, ES futures flipped from losses to gains, jumping about 20 points at roughly 6:50 – about 15 minutes before the segment began. I would attribute that more to savvy speculation in a thin market rather than inside information, even though it looks suspicious. In hindsight it seems like a safe bet that the Chairman would say mollifying things to a national TV audience on a general interest news program. That proved to be the case.

My response to the interview was that it was steady, offering the view that a recovery would occur eventually, though it could be painstaking and slow. By urging strongly for a fiscal response, it seemed as though the Congress was the target audience for his appearance ahead of tomorrow’s testimony before the Senate Banking Committee. Considering that futures only moved slightly higher in response, that seemed to be the consensus view. But traders seized the specific statement that “the Fed was not out of ammunition, not by a long shot.” Regardless of the fact that he neither acknowledged what those measures may be, nor any immediate desire to use them, the statement is catnip to markets that remain addicted to Fed liquidity and have been rewarded for not fighting the Fed.

At this point in the trading day, the market believes it has it both ways: the potential benefit from a vaccine and a Fed that continues to bolster speculation. Never mind that they are likely to be mutually exclusive. If there is the promise of a vaccine arriving soon, then the Fed is unlikely to deploy whatever ammunition they have at their disposal. That is especially true if the central bankers do not want to find themselves in a position to unwind recent accommodation in a fragile recovery. And if there is not a vaccine arriving soon, I’m not sure I want to know what those measures could be.

In the meantime, pretty much all news is good news. Smaller stocks rallied more than their large cap cousins. Smaller companies tend to be more economically sensitive, so they should benefit more if there is a clear path to economic recovery. Yet large companies continue to fare well. Amazon (AMZN) and Netflix (NFLX), which have been rewarded as pillars of the stay-at-home economy, turned higher after initial mild declines. Alphabet (GOOG, GOOGL) has also turned higher despite Friday afternoon’s late news that they would be subject to renewed Federal and State antitrust scrutiny. For today at least, we can put a positive spin on pretty much anything.

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