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Wednesday's Market Minute: Fed Fulcrum Is The Baseline Without Fiscal Policy

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Wednesday's Market Minute: Fed Fulcrum Is The Baseline Without Fiscal Policy

The question investors are trying to assess right now is how much stimulus has been priced into the market? Yesterday's limited drop in the market after the President's tweet suggests maybe not as much as you might think. But then it seems clearly we're getting something regardless of who wins in November. Either way, we should consider what market dynamics look like in the absence of new aid.

Last year as the Fed wound down its interest rate reversals (cuts), I outlined a blueprint for action called the Fed Fulcrum, which posited that declines in major asset classes would correlate to their dependency on a "lower forever" narrative that had become consensus in 2019, but fell short of reality: bitcoin needs the most extreme outcome of Central Bank policy (negative rates, debasement of currencies), gold the next most (currency wars, runaway inflation), Treasury bonds (no more capital appreciation), and then stocks (tech valuations enjoying the Fed model bull case). Each would reverse an appropriate amount of their gains once they lost the Fed as a catalyst.

The COVID crisis didn't allow this to play out fully, but with Powell now firmly on hold and no immediate fiscal support happening, I suspect this will serve as a baseline for thinking about what's next. Since their respective highs YTD, bitcoin is down 13%, gold 8%, long bonds 7%, and stocks 4% -- the order the Fulcrum suggests. Fiscal policy could change this blueprint quite a bit, in myriad ways. Another broad helicopter drop of cash would likely allow equity valuations to roam higher again. A targeted band-aid for troubled areas would be distinctly more supportive for non-tech stocks, which is not obviously positive for the market overall, and could actually accelerate the Fulcrum-driven declines if truly growth-positive.

Then there is another scenario, in which huge fiscal spending that is not obviously growth-positive doesn't help stocks, but strengthens the case for gold and bitcoin. The crucial question to investors will be whether the fiscal impulse is strong enough to offset the central bank unwind.

Photo by M. B. M. on Unsplash

 

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Posted-In: Bitcoin TD AmeritradeCryptocurrency News Economics Federal Reserve Markets

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