In case you missed it, last week the Fed fired a warning shot across the bow of investors who’ve won the bet, so far, the stock market would enjoy a V-shaped recovery and the economy would follow suit.
No, the Fed didn’t upset the applecart on Wednesday. The market tested itself on Wednesday when fear of rapidly rising virus spikes in Arizona, Texas and Florida triggered profit-taking.
The Fed didn’t upset the market on Thursday either. It actually helped stocks rally on the heels of Wednesday’s selloff when it announced all its children, the banks it shepherds, all passed their stress tests.
Banks rallied nicely on Thursday as investors cheered the good news.
But it was fake news.
When investors figured out what the real story was, what the Fed was really telling them, what the Fed actually told the banks, Thursday’s end-of-day rally turned to dust on Friday morning and threw stocks into a mini-freefall into-the-close.
As for the banks, their Thursday into-the-close rally turned into a Friday massacre.
The message, for anyone who missed it, was the Fed telling the world that they told the banks they couldn’t buy back their shares for a while, and worse, because they hadn’t been buying back their shares anyway, they are going to be limited on how much they can pay their shareholders in dividends.
The not so subtle message there is, you’re all in trouble if this recession thing is worse than you think, and we’re not going to let you payout your capital as you see fit, we’re limiting what you can payout so you build up more reserves. Because, you’re going to need it.
That’s why the banks sold off so hard on Friday. That’s why the market sold off so hard on Friday.
That’s a warning shot to investors assuming all things V-shaped, the worst of our economic woes may not be over.
Speaking of fake news, the banks passing their stress tests was only on account of them all getting graded on a curve. Since early 2019 the Fed’s been lightening up on some measures, including doing away with some leverage ratio tests.
There were no test questions, in fact there was no mention anywhere, of coronavirus or Covid-19. None.
The thing the whole world’s stressing about wasn’t anywhere in the tests.
Daniel Tarullo, the man in charge of bank regulation at the Fed from 2009 until 2017, said Thursday’s moves “don’t really amount to much” and reflect a “substantial erosion” in the value of the annual tests.
Of course, they were all going to pass. Who wants a panic, especially a run on the banks?
The banks are going to be under pressure now because they come out with their capital plans this week.
Some of them, unfortunately for me and some of you, probably Wells Fargo, will have to cut their dividend. That’s because banks can’t payout more than their average quarterly profit based on the average of their most recent four quarters, and that puts Wells in the line of fire.
This is the week to watch the banks. The market might try and rally, but if the banks get hit all week, the market will follow.
It’s now starting to look like markets are flattening out, maybe consolidating, maybe drifting, at best.
They may see more profit-taking, like I said, if the banks get hit hard.
Be careful out there.
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