Goldman: The Fed Was The Main Driver Of Markets In 2019

Having been repeatedly branded "conspiracy theorists" over the past decade for daring to suggest what was painfully obvious to anyone, we have found it delightfully enjoyable watching as one "expert" after another caved, admitting that when one strips away all the "made for TV" bullet points, all the profound analysis about fundamentals, all the fancy squiggles that pass for technical analysis, and virtually any other theory meant to 'explain' why stocks do this or that, the market's performance has been nothing more than a function of central banks intervention and, increasingly more often, manipulation.

And it's not just the past decade that has been a direct function of the Fed's intervention in markets - the Fed's all too visible hand has been obvious across the past 50 years! As Bank of America showed one week ago, when paraphrasing a certain politician saying "It's the Fed, stupid" and highlighting the 1968-76 period of Vietnam, end of Bretton Woods, credit events, oil shock, Nixon impeachment - just like now, so then the Dow Jones slavishly followed path of Fed policy, as easing caused rallies, and tightening caused corrections.

What about a closert timeframe? Well, as Goldman's Christian Mueller-Glissmann confirmed last week, "Monetary policy" was the main driver of risk appetite YTD, "first with the Fed dovish pivot at the beginning of the year and then with a second dovish wave in June from both the Fed and ECB."

In fact, to offset the negative impact of declining global growth, of a strong dollar and rising Euroarea risk, the positive impact of monetary policy combined across all DM central banks and which culminated with the TINA 2.0 phase, hit the highest level in at least 5 years, as panicking central bankers unleashed every available weapon in their arsenal to preserve stocks and avoid a global recession-inducing recession.

So now that we know what, or rather who, drove the S&P back to all time highs this summer, Goldman has some less pleasant news: as Glissman writes, "the support from monetary policy is fading... since the end of August. Initially this came alongside a sharp steepening of US yield curves and an increase in US 10-year TIPS yields - a reversal of the ‘risk off’ move in August - as "Global growth" recovered at the same time. But since October "Monetary Policy" has declined further, even as "Growth" fell sharply at the beginning of the month."

The bottom line: "Near-term, it seems increasingly difficult for G3 central banks to surprise in a dovish direction without weaker growth first."

Needless to say, while the Fed can still push stocks to all time highs - hardly difficult when its policies allow companies to issue unlimited debt at record low yields and use the proceeds to buyback their stock - the fact that it is losing control over global economic growth is a major concern, one which we discussed more in depth in "These Are The Two Huge Risks Facing Traders Right Now", but which can be described as follows: with less support from monetary policy, ‘good news’ is ‘good news’ and ‘bad news’ is ‘bad news’ for markets. That's because like central bank intervention "bad news is good news" regimes tend to be temporary as either monetary stimulus runs out and weak growth eventually hits risk appetite or growth picks up, driving more positive surprises. After being mostly negative YTD, macro surprises have started to turn positive for the first time since April 2019, albeit only marginally.

The bottom line: unless we get much better "good news" soon, the market may be in for another major selloff. Actually scratch that: even "good news" could lead to a violent rotation out of positions geared for a world where the economy is expected to keep deteriorating. In short, for the first time in over a decade, traders are facing a real "lose-lose" proposition.

Meanwhile, to extend the time in which global growth finally turns positive, the Fed recently went all-in again, and in addition to cutting rates, Powell was forced to resume QE (just don't call it QE) for no other reason than the BOJ's balance sheet had been shrinking faster than the ECB's is set to grow, leaving the Fed no other choice than to get join the money printing part again, as JPMorgan explained earlier.

Should the Fed fail in engendering a meaningful growth pick-up, Goldman concludes that "markets remain vulnerable to negative shocks" and points to the recent sharp negative turn in the correlation of the VIX with 10-year TIPS yield.

Such extreme reading were observed on four notable occasions in the past: during the Tech Bubble Burst (2001/02), the Global Financial Crisis (2008), the Euro area crisis (2011) and the EM/Oil crisis (2015/16). And with all ingredients in place for another "event", the only question now is whether this will happen before the Nov 2020 election, or just after.