Powell's Potent Put Powering Stock Market Meltup

From meltdown to meltup. The Greenspan Put, the Bernanke Put, and the Yellen Put all resulted from actions taken by the Fed under those three Fed chairs to give stock prices a boost when they seemed to need it to avert a meltdown. The Powell Put saved the day in late 2018 when the Fed chair started to pivot away from raising the federal funds rate in 2019 to actually lowering it three times instead. The S&P 500 soared 44.0% from December 24, 2018 to a record high on February 19, 2020.

On March 11, the World Health Organization declared that the COVID-19 outbreak had turned into a global pandemic. The pandemic of fear spread just as rapidly in the US capital markets, especially in the bond markets, which seized up as credit-quality yield spreads soared.

On Sunday, March 15, the Fed responded by cutting the federal funds rate by 100bps to zero and announcing a $700 billion QE4 program of Treasury and mortgage-backed securities purchases. That week, the governors of California and New York issued executive orders requiring nonessential workers to stay home. Credit-quality spreads continued to widen significantly. So on March 23, the Fed introduced QE4ever and posted term sheets on five major credit facilities.

Three of the new facilities dated back to the Great Financial Crisis and were reactivated. The big shockers were the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF). For the first time ever, the Fed was going to lend a hand to the investment-grade corporate bond market. On Monday, June 15, the Fed announced that the SMCCF would start buying corporate debt, and promised to activate the PMCCF soon, as discussed below.

In response to the Great Virus Crisis, Powell provided the biggest Fed put of them all, boosting both stock and corporate bond prices. The result has been to stop the 33.9% meltdown in the S&P 500, which lasted from February 19 through March 23. I'm not sure that deserves to be categorized as a bear market since it lasted only 23 trading days with declines exceeding 20% during only seven of those days! In any event, the meltdown was followed by a meltup with the S&P 500 soaring 44.5% through June 5.

The Fed's actions stopped the credit crunch and allowed corporations to raise piles of money at record low interest rates:

(1) Corporate bond yields. The Aaa-rated and Baa-rated corporate bond yields fell to record lows of 2.44% and 3.45% on Monday, June 15 (latest one was issued May 2020. All four reports recognized that there was too much dodgy corporate debt. Here is what the latest report had to say on the subject:

“At the beginning of 2020, about half of investment-grade debt outstanding was rated in the lowest category of the investment-grade range (triple-B)—near an all-time high. The amount of debt downgraded from investment grade to speculative grade in 2019 was close to the historical average over the past five years. However, almost $125 billion of nonfinancial investment-grade corporate debt has been downgraded to speculative grade since late February, and expected defaults may rise if the economic outlook and corporate earnings are revised downward. Widespread downgrades of bonds to speculative-grade ratings could lead investors to accelerate the sale of downgraded bonds, possibly generating market dislocation and downward price pressures in a segment of the corporate bond market known to exhibit relatively low liquidity.”

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

The report sounded the alarm on leveraged loans as well:

“Defaults on leveraged loans ticked up in February and March and are likely to continue to increase, with the specific contour highly dependent on the path of overall economic activity. Such developments would weaken the balance sheets of lenders, including CLOs that hold leveraged loans, and amplify the economic effects of COVID-19.”

During his October 30, 2019 press conference , Fed Chair Jerome Powell was asked about financial stability. He responded: “Obviously, plenty of households are not in great shape financially, but in the aggregate, the household sector’s in a very good place. That leaves businesses, which is where the issue has been. Leverage among corporations and other forms of business, private businesses, is historically high. We’ve been monitoring it carefully and taking appropriate steps.” He didn’t specify those steps. However, the Fed’s three interest-rate cuts during 2019 undoubtedly kept lots of zombies alive and fed their appetite for more debt.

As a result of the Great Virus Crisis, we now know how Powell is dealing with the corporate debt crisis. He is buying lots of it and enabling corporations to issue much more of it!

Written By: Ed Yardeni