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Traders woke up Thursday morning thinking 8:30 a.m. was going to set the mood for the day. That's when the U.S. Department of Labor was scheduled to release its weekly number of new unemployment claims made the previous week.
As it happens, the numbers were awful, at 6.6 million new applicants. That's in addition to the 6.9 million the week before, and 3.3 million two weeks prior.
In other words, an astonishing 16.8 million Americans have lost their jobs in just three weeks. That beats the records set during the Great Depression by several times over (of course, the United States has a much larger population now - but still...)
This weekly number was also way worse than expected, with analysts estimating something between 3 million and 5 million new claims.
But instead of dropping, markets opened up more than 1.5%. It's as if 6.6 million people losing their jobs in a single week won't affect companies negatively.
Well, in the short term, that may be the case. Because at almost the same time that the Department of Labor released its data, U.S. Federal Reserve Chair Jerome Powell went on air.
What he announced sent pre-market trading skywards. It was yet another stimulus plan, for another $2.3 trillion.
This time, the Fed will be guaranteeing loans made to states and municipalities, and also to households.
But the most important piece of the announcement has the Fed doing something it has never done before...
And it sent one part of the market up three times more than the Dow.
Should you jump on the bandwagon? Here's what I think...
The Fed Is Buying "Junk" Bonds for the First Time Ever
As part of his announcement, Powell declared that for the first time ever, the Fed would be buying so-called "junk" bonds directly.
"Junk" bonds are bonds that rating agencies deem so risky they are not "investment grade." Pension funds and many other institutions are not even allowed to own junk bonds. In short, this part of the bond market is not for the faint of heart.
Of course, companies operating in this part of the market still need to raise money. So, to entice investors, companies offer buyers much higher yields on junk bonds than on safer investment-grade bonds.
For the past few years, this has worked well. The economy was humming along, the Fed injected liquidity when needed, and employment numbers were rising.
And the U.S. shale oil industry pumped ever more oil with funding made from issuing junk bonds.
But with the dual crises of the global economic shutdown due to the pandemic and the Saudi-Russian oil price-war, suddenly the United States - and the oil shale industry especially - was sent into a tail spin.
That, along with many other businesses having to close down, sent the price of bonds falling, and junk bonds faster than the rest.
That's why the Fed decided to step in and backstop this part of the market. This is something it didn't do even back during the 2008 financial crisis.
And the result is that junk-bond ETFs, such as iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) jumped more than 6%, compared to about 1.5% for the Dow.
Now, I have no doubt that the timing of the Fed's announcement was intentional. It effectively overshadowed the dire economic news coming out of the unemployment numbers.
That shows the Reality Gap we're in right now...
About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.