The collision of two powerful and opposing forces has created an uncertain outlook for equity
markets. Aggressive stimulus from the Fed – which Powell says has “no limits” – has caused
the monetary base to surge relative to the equity market cap (top-left chart), while leading
indicators continue to collapse (top-right chart), showing the US economy is in a deep recession
that will take time to recover from. For now, the monetary bazooka is winning as markets have
rebounded strongly, but it will be hard for the market to continue to focus on the Fed and ignore
the deep recession as the pace of new Fed announcements slows.

Last month, we cited the Chinese stock-market rescue in 2015 as offering
lessons for how markets react to aggressive attempts by authorities to prop up prices in the
face of challenging fundamentals. As the last chart shows, the initial Chinese stimulus caused a
sharp equity rally, which then attempted to consolidate at higher levels, but ultimately gave way
to another sell-off as the pace of government intervention slowed. We see a similar dynamic at
play today with the US market as the Fed tries to contain expectations for negative rates. The
Fed put is powerful, but there will still be windows of market vulnerability as equity markets grind
higher, such as a policy error from the Fed. We would look to lighten up equity allocations or add
short-term portfolio hedges (eg put-spread collars) to create room to buy future dips.

Source: Bloomberg, Macrobond and Variant Perception