Fathom’s Chart of the Day 27.04.2020: Equities shored up by assumed Fed ‘put’

Equity prices have fallen on average by around the same amount as expected earnings per share since the start of the year. And earnings-per-share expectations are not on the whole factoring in the risk of a protracted, L-shaped recession. That risk has not disappeared, but the Fed ‘put’ option has arguably reappeared — an implied option to sell equities directly to the Fed should they fall below a certain price, or a promise by the Fed to buy government debt without limit and exploit the impact of portfolio rebalancing to the same end. Markets expect that the Fed will print whatever is necessary, putting a floor under equity prices for now, at least in the minds of equity investors in the larger DMs.

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This chart is taken from Fathom’s Recession Watch newsletter. Click here to subscribe to Recession Watch and receive invitations to Fathom’s regular Recession Watch Forums and participate in lively discussions with our team and others in the community.

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