Tag: Federal Reserve

The Fed Is Buying These ETFs - Part 2

Posted on by Matt Thalman

In part one of this piece, I pointed out what ETFs the Federal Reserve had purchased as of May 19th. Since then, the Fed has purchased more of these ETFs and began buying corporate bonds directly, not through an ETF.

In this piece, we will look at whether or not you should follow the Fed's footsteps and buy these funds or other bond ETFs, or whether you should find your own path and buy non-bond ETFs in the days, weeks, and months to come.

The first issue with the Fed buying bond ETFs is that the demand for said ETFs likely rose when the Fed was buying. This is simply a supply and demand issue, especially when the bond ETFs wasn't able to issue new shares. Issuing new shares can only be done when the fund was able to purchase more bonds to bundle into its ETF. And since the Fed was dumping large amounts of money into the market in a rather short period of time, the likelihood that these funds where all able to increase their asset bases are not high.

So, the Fed has probably already pushed the price of these ETFs higher than where they would typically be trading. This is not good for new investors. Continue reading "The Fed Is Buying These ETFs - Part 2" →

Are We Ready For A Second Wave?

Posted on by George Yacik

As we know well by now, the financial markets have recovered nicely from the initial wave of the coronavirus, at least until recently. After plunging by a third from its February 19 all-time high through its March 23 bottom, the S&P 500 has rebounded sharply, although it still remains about 10% below its record high. NASDAQ, however, has won back all of what it lost and now is solidly in the green for the year. Bond yields, meanwhile, have largely settled into a relatively narrow range, all of which signals that investors are fairly positive about the future.

Certainly, the most recent economic news has borne out that optimism. Retail sales jumped a record 17.7% in May after plunging 14.7% in April, the first increase in fourth months. Moreover, May sales in dollars were only 7.7% below where they were in February before the worst effects of the virus hit. In other words, after an extraordinary dip, spending is already close to where it was as more stores and restaurants reopen.

Elsewhere, the Conference Board’s index rose a better than expected 2.8% in May after falling 6.1% in April. Sales of newly-built homes jumped 16.6% while the National Association of Home Builders’ confidence index surged 21 points in June to 58. Sales of existing-home sales, by far the largest category, dropped nearly 10% in May, but that “reflected contract signings in March and April, during the strictest times of the pandemic lockdown,” the National Association of Realtors said, adding that “home sales will surely rise in the upcoming months with the economy reopening, and could even surpass one-year-ago figures in the second half of the year.”

While all of that is undoubtedly good news, is it sustainable? Right now, two main questions are facing the economy and the financial markets: How bad will a dreaded “second wave” of the virus be on both the nation’s health and economy and what happens now that the U.S. government’s stimulus programs have started to run out? Continue reading "Are We Ready For A Second Wave?" →

The Fed Is Buying These ETFs And Why It Matters (Part 1)

Posted on by Matt Thalman

The Federal Reserve is doing everything it can right now to help prop up the US economy and minimize the impact of the Covid-19 pandemic has on the economy, including purchasing ETFs.. The Fed has, by almost all market participants' views, acted very quickly, very aggressively, and rather decisively in their attempt to limit both the short and long-term effects this pandemic has on the US economy, despite the country permanently shutting down for nearly two months.

The first move by the Fed was to reduce interest rates by lowering the Federal Funds rate. Then, they began buying Treasury Bonds and mortgage-backed securities, (they have of course performed a number of other 'lending' type activities that have lower rates for lending and made it easier for more money to flow into the system, but for the average person knowing that the Fed lowered interest rates and started buying Treasury bonds and mortgage-backed securities, that is really the gist of it. To read more about the exact things they have done, check this article out.) Both these moves the Fed has done in the past, so no surprise there when they announced their plans.

However, in an attempt to pump liquidity back into the market, maintain low-interest rates, give business leaders and consumers the confidence they need to continue spending the Fed is now also buying Exchange Traded Funds.

Why are they buying ETFs and not something else? Continue reading "The Fed Is Buying These ETFs And Why It Matters (Part 1)" →

Disconnect? What Disconnect?

Posted on by George Yacik

Over the past few weeks, the financial news media has been marveling at what it calls the “disconnect” between stock prices and the economy. Economic and health statistics are likely to go from bad – 30 million unemployed in the past month, a 4.8% drop in first-quarter GDP, an 8.7% drop in retail sales in April, more reported coronavirus cases and deaths – to worse – a nearly 40% drop in GDP and around 15% unemployment in the second quarter, according to the Congressional Budget Office’s latest projections. Yet the stock market has blissfully regained about half of the 34% drop it sustained between mid-February and mid-March.

But is there really a disconnect? Does the economy – now largely controlled by the Federal Reserve and the U.S. Treasury Department – still have any correlation to what happens in the stock market anymore, and vice versa? Well, the answer is yes, but not in the way it used to. What’s happening is that as the economy goes deeper into the red, the more it prompts the government to pump in more money and for the Fed to intervene more in the financial markets. That is unquestionably good for stocks.

We have been in an environment since the 2008 financial crisis where the Fed has played an unprecedented activist role in the bond market and, indirectly, the stock market. That role has grown further under Chair Jerome Powell, who seems to believe it’s the Fed’s job to rescue equity investors any time stock prices correct, never mind what’s going on in the economy. Now that we’re in the middle of an economic downturn that makes 2008 look like a garden-variety recession, the Fed has put its monetary policy and quantitative-easing engines into Continue reading "Disconnect? What Disconnect?" →

Socialism's Dry Run

Posted on by George Yacik

Is it any wonder why many millennials gravitate toward socialism? As children, many of them watched their parents lose their homes after the 2008 financial crisis and real estate crash. Then they entered college and are now stuck with tens of thousands of dollars in student loans that prevent them from getting a car loan or a mortgage. Now they're in the middle of an even bigger global financial crisis, one that may leave 30% or more of the workforce unemployed, either temporarily or perhaps for several years.

Thankfully, the government and the Federal Reserve have stepped in with a mammoth rescue effort that will hopefully tide many people over until the economy rebounds. So that means for a period of time, either several months or perhaps years, the government will be keeping many people afloat. We'll get a feeling for what socialism will be like, meaning lots of people are not working and the government paying their bills. How long this state of affairs can last without some kind of societal impact is anybody's guess.

The immediate consensus when this crisis started was that the economy would rebound nicely in a "V-shaped" recovery in a couple of months, but that idea seems to have lost some of its steam. Now there's a growing belief that many parts of the economy will take a very long time to recover, and many industries, such as restaurants, air travel, sports and entertainment, and tourism, may return only as mere shadows of their former selves. How long will it really take for people to get comfortable again in large crowds in close proximity to others? Continue reading "Socialism's Dry Run" →