The Fed will show a path

The behaviour of the S&P 500 this year is remarkably similar to that seen in the aftermath of the last major panic 11 years ago. In both years, 2009 and 2020, the S&P 500 hit a low in the month of March. This year’s low was 33 weeks ago and we are 66% higher. Interestingly, the S&P 500 was 65% above the March 2009 low 33 weeks later.

S&P 500

 

While the nature of the underlying crises were not the same, the Fed’s response was the same – namely to expand their balance sheet. In that regard we see further similarities. Between the months of May and December 2009 the Fed’s balance sheet was relatively steady around, or just below, $2trn before another expansion. This year is not much different in pattern and pace . The Fed’s balance sheet stopped expanding after June and has since been relatively steady around $7trn.

Today with the election behind us, the economic situation on the ground seemingly worsening in the face of rising Covid-19, and the lack of clarity on any fiscal package, the Fed may well be ready to expand its balance sheet yet again. This would likely lend further support to the equity markets. Some may ask whether such a policy will have any impact on the economy? As a minimum, it would likely to keep asset prices high and, importantly, send the USD lower confirming its lead in the ‘Currency War’. Note that the Fed is already behind in this respect. While their balance sheet expansion has paused, the ECBs and BoJs have continued to expand leaving the size of the ECBs balance sheet larger than that of the Fed at this juncture – a situation that is unlikely to last.

We must also bear in mind that in late 2009 as the Fed’s balance sheet expanded the Gold price was making new trend highs – expect the same again over the coming months.

If the overall picture on this S&P 500 chart is to follow the path set 11 years  ago, we should trade above 4,000 before seeing a decent correction down.

So far this picture shows a decent trajectory as history once again rhymes. Additional charts & commentary on the USD and Gold are included below.

USD Index (DXY) Monthly Chart

 

Gold-G4 Index

Look for a turn back up from around these levels as the market is trading near supports with positive momentum divergence. Covid is not over nor is extreme monetary policy. In fact the Fed has been behind for a few months as the ECB and BoJ have continued to expand their balance sheets throughout the year without pause.

 

SKA