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While the Covid-19 news has continued to grow more negative in the past month, with confirmed global cases numbering well over 3 million and deaths over 200 thousand, stock market investors have decided to look through the abyss and base decisions on an imminent recovery in economic growth supported by a long period of extremely low interest rates and other accommodative central bank actions. Despite U.S. job losses that wiped out the entirety of the gains since the Financial Crisis, stocks managed to post the two best individual weeks since the 1930’s. Investors are once again convinced that central banks will provide the fuel for further market gains, much like they did when they pumped liquidity into the stock economy via their QE1,QE2,QE3 and ‘Operation Twist’ programs following the financial crisis. The economic and earnings outlook suggest that the market should be lower, but the Fed is ‘putting their thumb on the scale’ in favor of the market. That stimulus was clearly needed to stop the massive liquidation in most financial markets in the first half of March. The Fed ‘did what they needed to do’ to put some floor under financial markets by providing well over US$2 trillion of liquidity from their balance sheet to buy debt, provide funding to banks and effectively ‘lubricate the financial system’ to stop it from breaking down. The chart below shows how aggressive these central bank actions have been in the past two months as well as plans for the balance of this year. The U.S. Federal Reserve has provided over US$3 trillion of liquidity to keep financial markets operating smoothly, taking their total balance sheet to over US$6 trillion. The European Central Bank, Bank of Japan, Bank of Canada and all other major central banks have undergone similar initiatives. That reversed a trend that had been taking place for the prior three years wherein central banks had been trying to slowly remove the liquidity they provided to get out of the 2008 Financial Crisis. (more…)