The Fed has taken another unprecedented measure today, limitless asset buying (unlimited QE), which will include US treasuries, mortgage price security, some types of corporate bonds, and municipal debt. This was following congress’s inability to pass a fiscal stimulus plan last night.
Monday’s futures surged on the Feds unlimited purchase plan only to break down once the cash markets opened. The lack of cohesion between congress and the Trump administration is disconcerting, but Jerome Powell and his dovish board of governors at the Fed are attempting to alleviate some of the anxiety.
We are in uncharted economic and market waters. This is the first global pandemic we have seen in the technological age where information is disseminated at light speed. This hyper-fast information distribution is useful for controlling this virus but bad for the fearmongering that follows.
The Fed’s no cap QE at the lowest Fed Funds rate is a scary proposition, especially considering the 10-year US Treasury yield is trading at its lowest level in history. These unprecedented measures by the Federal Reserve could send us into the monetary black hole of negative interest rates. A black hole that Japan has struggled with for over 2 decades.
Fixed income instruments are becoming decreasingly desirable assets as yields drop. This is creating a springboard for the historically high-returning stock market. Once this pandemic is under control and the economy switches back on, I suspect that all this pent-up demand will be unleashed, in the best way possible. The novel coronavirus came in the wake of ostensibly the strongest US economy in history, and I am confident that our robust economic conditions will resume once we have controlled the virus.
The overhanging question and justified cause for this market crash is, how long will this pandemic and “economic shutdown” endure? How long can companies survive with no sales?
The biggest unknown right now is to what extent the federal government will come in and provide aid. A $2 trillion aid bill failed to pass last night, and another fiscal stimulus plan is expected to be voted on again today. The US economy needs aid. We need an effective economic stimulus to alleviate our anxiety-ridden stock market.
Only One Thing We Know For Sure
I suspect that a robust US government aid package, in combination with the Fed’s limitless asset buying, will boost the equity markets. Still, I would not suggest that you trade these volatile markets if you are not a seasoned trader. You will get burned if you try to call a bottom to this market break down. These markets are unbelievably choppy, and predicting the next move is no better than a coin flip.
Among all this uncertainty, there is only one thing that we know for sure, and that is stocks will recover. With this as a given, it would only make sense to begin buying up some of the healthiest stocks at their discounted rates.
What Not To Do
Don’t try to be a hero in this market and buy up toxic assets like Carnival (CCL - Free Report) , Six Flags (SIX - Free Report) , or even Macy’s (M - Free Report) . These companies are not essential to our economy, and they were on the decline before the novel coronavirus hit. You can see in the chart below that these stocks have been sliding for at least the last 2 years, and this downturn is only uncovering their true toxic nature.
What I am Buying
Microsoft ((MSFT - Free Report) )
This enterprise has a very robust balance sheet with over $134 billion in cash & equivalence. Microsoft’s product offering includes essential cloud-based business functions that will remain a necessity during these uncertain times. Work from home policies are going to help drive not only MSFT’s cloud segment but also its laptop computer segment.
Alibaba ((BABA - Free Report) )
Alibaba is the largest e-commerce and cloud player in the most populous country in the world (China). It has a robust balance sheet to weather this storm, and its necessity is becoming increasingly evident as quarantined China becomes more reliant on its services.
Sea Limited ((SE - Free Report) )
This firm controls the e-commerce, digital entertainment, and electronic payment segments in Southeast Asia. The internet world in this region is exploding. Digital revenues have tripled in Southeast Asia over the past 5 years and are expected to triple again in the next 5. Sea Limited is exhibiting prolific topline growth, appreciating its revenue by 163%. This company has an enormous amount of growth ahead of it.
I believe that we are closing in on a bottom to this market crash, with the S&P 500 roughly 34% off its all-time highs last month, and the US government is on the brink of an over $1 trillion rescue plan. I am beginning to buy healthy equity assets, and I think it is time you think about doing the same.
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