A maxim to trade by 

Learning lessons from the recent recovery in global stocks seems to be encapsulated by this maxim, ‘never bet against the Federal Reserve’.

When there has been a resurgence in virus cases the impact on stock markets has not lasted for very long. When you look at the big picture this is not that surprising. There is now a wide range of drug companies working towards a treatment or cure of COVID-19. The market is now expecting one of those companies to find a vaccine. A vaccine by year-end/early 2021 seems to be what the market is pricing and this can partly explain the recovery in global stocks.

Central banks and Governments keep economies supported  

The central bank mantra around the world seems to be ‘whatever it takes’ to support economies. This virus is seen as a once in a 50 year kind of event, so countries are willing to take on a bit of debt to try and get over the economic downturn. It is reasonable to assume that there will be plenty of liquidity available for companies in the near to medium-term future. QE, fiscal stimulus, and even negative interest rates are potentially on the cards to aid the fight. Whatever the rights and wrongs of recent monetary policy it is hard to just watch companies and individuals sink. There is also a vested interest for lawmakers to prevent an economic collapse, as a broken economy will lead to a change in the social order. That change, as history tells us, is nearly always a violent one.

“The typical political reaction to financial crises is as follows: votes for far-right parties increase strongly, government majorities shrink, the fractionalisation of parliaments rises, and the overall number of parties represented in parliament jumps. These developments likely hinder crisis resolution and contribute to political gridlock. The resulting policy uncertainty may contribute to the much-debated slow economic recoveries from financial crises.” – according to Vox’s article on the political aftermath of the financial crisis.

A medium-term bullish picture?

This means that any pullbacks in equity markets are most likely once again to be opportunities to buy. Second virus waves will be met by fresh stimulus hopes and everything will keep moving forward. We may well see some selling into the quarter, month, and half year end today and tomorrow, but eventually medium-term dip buyers will be coming back in.

A wider question remains one whether these dip buyers can take stocks to free highs. The risk is that rising unemployment levels may provide a more serious dent in the world economy.

However, in the short term, ‘never bet against the Fed’ is likely to be a great maxim to trade by. See here for some key support areas in the S&P500 where we would expect short term buyers to step in.