But Druckenmiller and Jones both said the strong rally in the P 500 index since March had left them perplexed and wondered how, in the midst of a global pandemic and civil unrest, the index could have rebounded with such force.
After all, even with Thursday’s heavy losses, the index is up 37% since its low in March.
They and others are now saying that an unprecedented combination of monetary and fiscal stimulus seems to have pacified the market in a way they have never seen before.
“Let me tell you, if there was a franchise for the humble pie, oh my lord there would be a mile to own that because we all had huge sips of it—myself included,” Jones told the New York Economic Club on Wednesday. “We have just had unprecedented moments in all directions, form or form.”
For those who don’t know the two investors, Druckenmiller— who said as recently as mid-May that he thought the market was overvalued – and Jones are not the type to change his mind on a whim.
Jones, whose fame on Wall Street may be linked to his brazen and precise prediction of the October 1987 collapse known as “Black Monday,” made much of his fortune by standing by his convictions.
Bets designed to pay in times of market constraints such as Black Monday, where the stock market fell 22% in one day, or before the Great Recession solidified Jones’ prowess.
Fellow billionaire investor Druckenmiller is also not a afraid to take a contrarian bet if he is convinced of a good trade. His famous short bet against sterling in 1992 brought in some $1 billion in profits to George Soros’ Quantum Fund.
So when Druckenmiller said Monday that he was humiliated by the market rebound and only returned 3% since the low March, others tended to pay attention.
The Fed: They’re “everywhere”
Explaining the rise of the S-P 500 since March is a tricky business with many possible answers, but Jones and Druckenmiller say the gains almost certainly have something to do with Washington.
Congress passed in March the $2.2 billion CARES Act, a mammoth piece of emergency legislation that sought to inject the U.S. economy with a much-needed cash infusion. The law, unmatched in American history for its scope and size, came as closed businesses and sheltered people at home to slow the spread of Covide-19.
It provided funding for hospitals and research laboratories, direct payments of $1,200 to people earning up to $75,000 and significantly increased unemployment benefits for the millions of Americans who would be out of work in the coming weeks. It also established the PayCheck Protection Program (PPP) and sought to provide support to many of the smallest businesses in the United States.
Another stimulus bill, the $3.5 trillion HEROES bill passed by House Democrats last month, has stalled in the Senate, where Republicans so far favor a wait-and-see approach to further boosting public finances.
But as useful as the CARES Act was for individuals and trade, investors applauded perhaps even louder for the Federal Reserve. The Fed, led by President Jerome Powell, announced a torrent of new lending powers throughout March and April to provide as much liquidity as possible to credit markets.
The Fed’s unprecedented response has indeed drowned out the cash market and provided business owners with one of the most powerful safety nets in U.S. history, said Quincy Financial Market strategist Quincy Krosby.
“Let me put it this way: the Fed’s balance sheet in December 2008 was about $880 billion. And then when they’re done [with Great Recession stimulus] it was about $4.5 trillion,” she said in a telephone interview on Tuesday. “Now, this time, in a very, very short order, they are over $7 trillion.”
But in addition to expanding its balance sheet and asset purchases, the central bank announced its own $2.3 trillion loan program that will provide credit to banks that issue ppp loans and buy up to $600 billion in loans issued through the Main Street program to mid-sized businesses.
He also said he would expand loan support plans to some of the country’s largest companies by supporting riskier bonds issued by companies that have lost their investment status.
“Think of how quickly they moved. And how quickly they entered every nook and cran at the market to stabilize financial conditions,” said Krosby of the central bank. “They’re everywhere, they’re everywhere. And they made it clear that they would not stop.
Not out of the woods yet?
But Krosby noted that while markets have been dynamic about the Fed’s monetary “bazooka,” recent economic data are beginning to show signs of improvement. She pointed to the strength in the housing market— and in particular mortgage applications for home purchases – as evidence Americans feel at least a little optimistic about their coming year.
Mortgage applications for the week ended June 6 rose 13% from last year despite higher interest rates, the Mortgage Bankers Association said On Wednesday. The May jobs report, which was much better than expected, also raised the stocks and economic outlook for 2020.
But while a drop in double-digit unemployment may have surprised rising investors, economists and politicians warn that coronavirus turbulence is unlikely to go away so soon.
U.S. Senator Bob Menendez said that while he is pleased to see signs of improvement in the labour market, much remains to be done to ensure that these successes are not lost in the coming months.
“I’m always happy when we get a good job report … but I think it’s way too early to claim victory,” the New Jersey Democrat said when reached by phone Wednesday.
Senator Bob Menendez (D-NJ).
Adam Jeffery Cnbc
Those nervousness was evident Thursday, when the Dow Jones Industrial Average dropped 1,800 points and the S.P. 500 lost 5.89% as the new Covid cases in the southern U.S. states sent investors running to take profits.
“I understand why people feel different from last time,” Menendez said. “In 2009, the stimulus bill was less than $1 trillion. That is one third of the size of what we have injected into the economy since March.
But, the senator argued, even more federal support is needed to help states like New Jersey that have endured an oversized proportion of U.S. Covide-19 cases and had to implement strict business closures to help slow its spread.
Menendez on May 18 introduced a bipartisan bill known as the SMART Act that would appropriate $500 billion from state and local governments based on infection rates and tax losses.
“I have enough data to know that there are things we need to solve,” he said. “‘Hope there is a sense of urgency now. July is going to be a determinant of whether these things happen or not.
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