Market bulls and bears are having trouble as ‘unlimited’ Fed support short circuits models

Trader Talk

A bear statue stands outside the Frankfurt Stock Exchange, operated by Deutsche Boerse AG, in Frankfurt, Germany, on Friday, March 13, 2020.

Alex Kraus | Bloomberg | Getty Images

Throw in the towel on a market pullback?

It’s getting lonely being a market bear. Investors — even market bulls — who are trying to figure out what will break the market’s momentum are just about at a loss for arguments.

Just ask Canaccord chief strategist Tony Dwyer, who said he was withdrawing his S&P 500 target because there is no precedent to how high valuations can go with low rates and essentially unlimited quantitative easing (QE).

He’s not alone. John Stoltzfus from Oppenheimer has also withdrawn his price target for the S&P 500.  BMO’s Brian Belski withdrew his 2020 price target some time ago but reinstated it last week, arguing “the market’s epic rally is challenging traditional forecast models that are based on earnings and interest rates.”

What’s going on? Since when are seasoned market analysts paid to give opinions suddenly at a loss for words?

“The Fed just told you they will let employment go to full employment before they pull the punch bowl,” Dwyer told me in a phone interview. “What multiple do you put on unlimited Fed support? In the past, recessions started when the Fed withdrew accommodation. The current Fed is telling you, we are not withdrawing accommodation.”

Dwyer acknowledges the Fed is repeating the 2009 playbook, but this is 2009 on steroids. 

“How do you value what multiple to pay when the Fed has told you they are not going to be raising rates in the future? Nobody knows, so I’m focusing on what the drivers are.”

Those drivers, Dwyer says, are historic excess liquidity from the Fed and evidence the global economy is going to pivot higher. 

The Fed’s action, Dwyer says, deprives bears of one of their most potent arguments: that inflation and interest rate spikes will end the rally any time soon.

For the moment, other arguments advanced by the bears have little or no traction. No fiscal stimulus deal? Market doesn’t seem worried, reasoning that if there is any signs of an economic downturn a deal will come together quickly. 

The tapped-out consumer is hitting the spending wall? Furloughs turning into permanent layoffs? Market believes Fed will keep pumping, and there will be a vaccine, so the labor market will recover. 

Stocks are too pricey? Traders already have said they will pay almost anything for the small group of consistent growth names.

Earnings are not recovering? Just the opposite: bulls are insisting earnings estimates are way too low for 2021, perhaps by 25%. This argument worked for the second quarter, when shell-shocked analysts dramatically underestimated corporate profits. Bulls are arguing they are doing it again.

Market advance is limited to just technology stocks?  Dwyer says that isn’t true either. Megacap tech are going up faster than everything else, he says, but other stocks are also advancing, just not as much.

Finally, where is the money coming from to buy stocks at such dizzying prices? Much of it is coming from the same investors who dumped stocks in March and went to cash or bonds.

The rally — combined with no yield on bond investments — is forcing investors out of cash and bonds and into stocks. There have been outflows in short-term Treasury funds (which are used to park money) for many weeks. One of the largest short-term funds, the iShares Short Treasury Bond ETF (SHV), has seen outflows almost every week since the end of May, with the share count dwindling from 228 million on May 27th to 178 million on August 31, a 22% decline. A similar short-term ETF, the SPDR Bloomberg 1-3 Month T Bill ETF (BIL), has also seen shares outstanding reduced by more than 25% in the same time period. 

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