Power & Market

Will You Buy the Dip?

March 23, 2020 was one of the greatest stock market buying opportunities of all-time. CNBC gives an account of the event:

The S&P 500 would not bottom until March 23, a week later. From the Feb. 19, 2020, high to the March 23 bottom, the S&P would decline about 34%.

Five months later, as if moved by some Miraculous Monetary Technique:

Then, almost as quickly, the market reversed. By August, the S&P was back to its old highs.

The market hit all-time highs less than two years after the 2020 low. A person could have practically bought any stock on March 23, 2020 and been guaranteed to double their money… at least.

If one had the money and knew an upward trajectory was to soon follow, they could have made a fortune; if only it were that easy… or was it?

On March 23, 2020, the New York Fed released the following announcement:

…the Desk has updated its plans regarding purchases of Treasury securities and agency MBS during the week of March 23, 2020. Specifically, the Desk plans to conduct operations totaling approximately $75 billion of Treasury securities and approximately $50 billion of agency MBS each business day this week…

Should anyone have missed the NY Fed’s inflationary idea, the Federal Reserve had a news release with the following headline on the same day:

Federal Reserve announces extensive new measures to support the economy

The March 23, 2020 release included several Fed/Congress money creation schemes, like buying debt from publicly traded companies, as well as an explicit reminder that a week prior, on March 15, 2020, the Fed:

will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.

The data came in the following year. It was declared that the COVID Recession lasted only two months, ending the week after the Fed’s March Monetary-Madness of nearly a trillion dollars in promises to increase the money supply:

According to the National Bureau of Economic Research, the contraction lasted just two months, from February 2020 to the following April.

Is there anything to learn from this?

There is no need to pretend Fed asset purchases had nothing to do with the increase in asset prices, and as we now see, the prices of most goods and services. Serious consideration must be given to the act of purchasing $120 billion a month worth of government and mortgage debt for two years and the astronomical rise in the stock market. To say: “Correlation does not equal causation,” skirts the point and is insincere at best.

Without the Fed’s almost $5 trillion support, it would have been incumbent upon the private sector, or another nation, to purchase America’s debt. Even, if possible, to say the private sector would accept this debt at rates approaching zero percent is a difficult position to hold. If this were the case, the Fed would be irrelevant.

The point to keep in mind is the relationship between money supply and prices. Rather than looking for a sign of the top, one can look for signs of the bottom, the idea being that it becomes extremely difficult for stocks to decline when the Federal Reserve is in the market. With the Fed promising to exit the market within several months, we should start wondering how much sand is left in the hourglass.

Whether it’s this year, the next, or some time beyond, there will be an event, such as the return of COVID, WW3, the next Lehman Brothers, anything really, to blame for the next stock market crash. Eventually, the Fed will find a reason to officially re-enter the market. They will not say it’s for the purpose of saving the stock market. They’ll use words like liquidity crisis, or cite the necessity of a smooth and functioning market. When this happens, the Fed will justify expanding its balance sheet once again. This article does not constitute investment advice, but this is the kind of dip the author is preparing to buy, backed by the full faith and credit of the United States Government and its central bank.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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