Follow The Leaders


Follow the leaders.  Stocks reversed early losses to close in the green on hopes of much-needed stimulus.  First time unemployment claims spiked last week indicating that new restrictions are having negative effects. 




Broken compass, cloudy skies… direction lost.  Economies require expert, high-minded custodians to ensure that things stay on track.  In non-capitalist economies (I am intentionally not being specific here) governments can manipulate numbers, plug gaps, and even create propaganda campaigns to stimulate citizens. In contrast with capitalist economies, governments are more like farmers, planting seeds, tending crops, and hopefully reaping rewards.  As we have learned, economies can fall in an instant in response to negative events such as the Financial Crisis or the Pandemic Crisis. Nursing the economies back to health is a more time-consuming effort and takes massive coordination between all branches of the Government. Central banks are responsible for monetary policy which provides liquidity in the banking system that lies at the core of all modern economies.  Modern economies means: growth enabling debt. Governments borrow money, companies borrow money, and everyday folks borrow money. Healthy borrowing enables growth and, in some cases, keeps things afloat through lean periods. The Federal Reserve controls statutory interest rates, which they raise and lower to make borrowing harder or easier.  In its open market operations, the Fed injects and withdraws liquidity through lending, borrowing, buying, and selling.  This puts the Bank in a very critical position. The Fed has also learned over the years that they are able to guide markets through what they now refer to as “forward guidance”. Beginning in the 1980’s markets began to react to things as subtle as the size of the  Fed Chairman’s briefcase.  Nuances in official policy statements began to set a tenor for public financial markets. Markets would rally on perceived dovish statements and pull back on hawkish ones.  This fact puts the Fed at an even more powerful leadership position.  The Fed can indirectly manipulate the stock markets, yep.  Thankfully, the Fed is non-political and has never demonstrated any nefarious intent.  So what does the stock market have to do with the economy as the majority of stock wealth is in the hands of a minority of the wealthiest Americans?  Research shows that when stock markets are doing well, consumers are more confident, even if they do not own stocks.  If you stand on top of the Federal Reserve Bank in Washington DC and face East, you are likely to catch a glimpse of the Capitol Building and turning your gaze slightly to the North (left), you are sure to spot the White House.  It is in those two hallowed buildings that fiscal policy is created.  At a high level, the Fed, using monetary policy, creates liquidity while the President and Congress create fiscal stimulus by spending money.  They can also legislate to stimulate the economy, but that is a topic for another note.   When the pandemic struck the US earlier this year, the Fed was quick to react with an unprecedented package of monetary stimulus.  In fact, the Fed had been very active in the prior 12 months keeping the already-tender economy afloat with interest rate cuts.  Further, the Fed was quick to signal to the financial markets that it was taking an active and progressive approach to support the economy.  Congress was a bit slower to react, but ultimately, it was able to pass the CARES Act which would require the coordination of the Treasury and the Federal Reserve.  In addition to providing stimulus checks and extended unemployment, the Treasury would provide funds to the Fed, which it would use to lend to businesses, municipalities, and banks in order to backstop further economic fallout.  This coordinated effort was responsible for not only stopping the economy from falling further, but also turning it onto a track for recovery.  The CARES Act was unprecedented in size and was intended to have follow-up packages which would include more directed stimulus.  As the affects of the CARES Act began to wear off while the pandemic raged on, it became clear that a follow-on stimulus package would be required to bridge the economy until the pandemic could be contained. Unfortunately, bitter politics kept Congressional lawmakers from achieving any results.  Hope sprang when the Administration took a leadership role in negotiations which were spearheaded by Treasury Secretary Mnuchin.  Ongoing negotiations provided the markets with hope…  and then came the elections.  Immediately following the elections, the Administration disengaged from talks, stating that it would be up to Congress to come up with a compromise.  That did not instill too much optimism as a lame-duck Congress has little incentive to do anything meaningful.  Still, there was hope that a January inauguration would usher in new ideals, new leadership, and new talks… and hopefully some critical stimulus.  Yesterday, stocks were on track to have a third day in the red when news that Senate Minority Leader Chuck Schumer and Majority Leader Mitch McConnell were set to begin stimulus discussions.  Stocks reversed course and closed in the black, snapping a 2-day losing streak. Last night, WHILE YOU SLEPT, Treasury Secretary Mnuchin released a letter to the Fed requesting that it return funding provided by the Treasury for use in its pandemic-relief lending programs.  The Fed was quick to respond with a statement calling the Treasury to withdraw the request and keep things status quo at this critical juncture. The markets initially responded by selling off in futures, but has since recovered somewhat. Markets require leadership and direction, which unfortunately, at the moment, is in short supply. The next 60-days will be critical as markets will have to gain leadership from within.




Stocks closed up yesterday, reversing early gains brought on by a disappointing weekly employment figure.  News of a rekindling of stimulus talks in the Senate turned the markets positive.  The S&P500 rose by +0.39%, the Dow Jones Industrial Average closed up by +0.15%, the Russell 2000 jumped by +0.84%, and the Nasdaq Composite Index added +0.87%.  Bonds gained ground and 10-year treasury yields fell by -5 basis points to 0.82%.




– Today’s Fed speakers include Kaplan, Bostic, and George.

Listen carefully, as they are sure to bring up the latest spat between the Bank and the Treasury.

– Next week’s numbers include manufacturing/services PMIs, housing numbers, GDP, Personal Income, Personal Spending, PCE Deflators, and University of Michigan Sentiment in a compressed week.  Check back on Monday for calendars and details.


daily chartbook 2020-11-20


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