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The “repo” market is sacred financial “plumbing”. It was, after all, the epicenter of 2008’s crisis eruption. Critical lessons were either never learned or conveniently forgotten. Building upon the dovish U-turn, the Powell Fed embraced “whatever it takes” to ensure liquidity was not an issue during the fourth quarter and especially for typical year-end funding pressures. Recalling Y2K, it was in the end a bogeyman that had the Fed pouring fuel on a raging speculative bubble. Powell’s “midcycle adjustment” was completely abandoned. There was for now and the foreseeable future one cycle: easy “money” – and the only uncertainty: How easy? The Ultimate Asymmetric Policy.
Federal Reserve Credit expanded $395 billion in the final 16 weeks of year. Like rates, a year that began with expectations of Federal Reserve balance sheet “normalization” ended with aggressive quantitative easing operations. The Fed announced in October it would purchase $60 billion of T-bills monthly through at least the first-half of 2020, with Fed Credit ending 2019 at $4.121 TN (high since November 2018).
Goldman Sachs CDS ended 2019 at 52.39 bps, only a couple basis points from the low going all the way back to 2007. From a high of 465 on January 3rd, high-yield corporate CDS sank to lows since 2007 (ending 2019 at 280 bps). A notable 80 bps of the high-yield CDS decline ensued following the October announcement of the Fed’s balance sheet expansion strategy. And after trading to a high of 95.5 on December 24, 2018, investment-grade CDS closed out 2019 at 45.3, also near the lows since before the ’08 crisis.
The S&P 500 returned 10.4% in the 11 weeks following the Fed’s announcement. The Nasdaq 100 (NDX) returned 13.1%, while the Semiconductors (SOX) jumped 19.4%. The Banks (BKX) returned 17.9% and the Broker/Dealers (XBD) 17.3%. The small cap Russell 2000 returned 12.7% in 11 weeks. The NYSE Healthcare Index returned 14.9%, as the Biotechs (BTK) surged 21.7%.
Quite a squeeze unfolded. The Philadelphia Oil Services Index returned 26.2% between the Fed announcement and year-end. Tesla (NASDAQ:TSLA) jumped 71% in 11 weeks. Advanced Micro Devices (NASDAQ:AMD) surged 62% to end 2019 with a 148% gain. Target (NYSE:TGT) gained 94% for the year, outpacing Chipotle’s (NYSE:CMG) 93.9% and Lululemon’s (NASDAQ:LULU) 90.5%. Apple (NASDAQ:AAPL) rose 86.2%, trouncing Facebook (NASDAQ:FB) (56.6%), Microsoft (NASDAQ:MSFT) (55.3%), Adobe (NASDAQ:ADBE) (45.8%) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) (29.1%). Xerox (NYSE:XRX) jumped 86.6%. There were 56 stocks within the Nasdaq Composite that posted 2019 gains of better than 200% (174 at least doubled).
The announcement of a “phase one” U.S./China trade deal stoked the year-end rally. There is still little to indicate must substance in this agreement but, like with so many things, it doesn’t really matter. The geopolitical backdrop was fraught with great risk – that markets were content to ignore. Even Thursday night’s U.S. assassination of Iran’s Qassem Soleimani hit the S&P 500 for only 0.7% (Russell 2000 down 0.35%). As has become typical, safe haven assets seem more keenly focused. Ten-year Treasury yields sank nine bps Friday to 1.79%, with bunds down six bps to negative 0.29%. Riding blustery Monetary Disorder and geopolitical tailwinds, Gold surged $42 this week to a six-year high $1,552.
It was a year of excess too many to mention. Hedge fund billionaire paid a record $238 million for a central park apartment – followed by $122 million for a London mansion and $99 million for a property neighboring his oceanside Palm Beach estate. “Beauty mogul” Kylie Jenner becomes a billionaire at 22. Art and collectable markets continued to go bananas. From MarketWatch: “An Italian artist duct-taped a banana to a gallery wall in Miami as part of the Art Basel festival – and it sold for $120,000.”