Yahoo! Finance's Brian Cheung to discuss how the Federal Reserve continues to respond to the COVID-19 outbreak.

Video Transcript

JEN ROGERS: You got about an hour of trading left. Stocks up right now, crude's up, 10-year yield higher, VIX is lower. Checking out sectors right now, we have real estate right now taking off more than some 6% here, all 11 sectors to the upside. We have also gotten Fed minutes. We'll get some details on that. So lots in motion here today.

Of course, yesterday, a really interesting close after we'd given up some huge gains, a lot of action in those last 10 minutes. We've been seeing that periodically. We'll have to wait and see if that indeed transpires again.

I want to bring in my co-host Myles Udland. So Myles, the S&P 500 has now jumped more than 20% above its recent closing low from March 23rd. How should we be thinking about that? Well, because there's going to be these headlines, right, that come out about a new bull market. What is the-- what's the smart money saying right now about that?

MYLES UDLAND: Well--

JEN ROGERS: Which is you.

MYLES UDLAND: I'm not the smart money, so it doesn't matter what I say. Look, I think Howard Marks' memo that he put out last night, it got a lot of people's attention in the way that he divvied up his view on the market. And he simplified his approach to investing in two ways. There are times to play offense and times to play defense.

And I think, you know, what has been interesting about watching Marks' arc over the last, really, three or four years is, he's been playing defense for quite a long time. Even as the S&P 500 went up a lot, he talked about valuations in the area of the market, the high yield special situations, kind of stuff Oaktree looks at more closely. That hadn't been attractive for a long time.

And so we've seen the stock market come up, but we've also seen Howard Marks last night, among others, saying it's time to play offense. And in his memo, Marks outlines that it doesn't mean that stocks are never going to go lower from here. It doesn't mean that all the bad news is already gone.

It just means that there have been enough dislocations in the market, whether you want to buy common stock or you want to buy the yield of debt that you can only-- you know, some kind of leveraged finance situation, something that you have something more esoteric, right? All that stuff is now likely to be more attractive than it was a couple of weeks ago.

And as we've gotten through this panic phase of the crisis-- and I think there was very clearly a panic phase in late March and now whether we're talking about the virus itself or the financial markets, there's now an acceptance phase to what happened, what is going to happen, and how we can maybe start to talk about the other side of it.

And so when you have Marks coming out, among others, saying it's time for offense, it's time to think about the next phase of this, I think that is all part of the market's conversation today. And I think again, you know, the VIX coming down, we've talked about that ad nauseum. And we will talk about the VIX ad nauseum until we start seeing the VIX print under 30 or even under 25 if we look out a few months into the future.

And so I think the market continues to have a more constructive pose. You know, broadly speaking, that doesn't mean, again, that this is all over and that that was the sell-off, that was the bottom, and now we move on. But there continues to be decent data, whether it's on the virus or on how people are looking at the response from DC that backs up a relative amount of bullishness I think among investors.

JEN ROGERS: And I think relative is a good word to throw in there. Even when we had Howard Marks on the show-- was it last week? I've kind of completely lost track of time here. But he's tempered in his optimism and the idea of being able to-- he's not saying, as he wrote, the outlook is positive. It's just that you don't have to be as cautious as you were just a little while ago.

A lot of what's changed in the picture is the Fed. And let's bring in Brian Cheung. Brian, the Fed was doing so much. It was just rapid fire in terms of moves, and now we haven't seen you in days. But we get [INAUDIBLE]. Now we get to go back and decipher everything that happened. What was the big-- the biggest takeaway in the minutes today?

BRIAN CHEUNG: Yeah, Jen, I'm still here. The thing about the Fed minutes that were just released today is you have to remember that it covers the emergency meeting and their announcement on that Sunday night. That was March 15th. It feels like so long ago.

But it means that the minutes also don't cover a lot of the Fed actions that we've seen in the past few weeks, which means that it didn't cover many of the liquidity facilities that it announced to address things like the US Treasury market, like commercial paper, like investment grade corporate debt. So this is definitely very backward looking.

But what we do know is that that March 15th meeting was quite monumental in terms of the scale of what the Fed announced. It slashed rates to zero. It restarted quantitative easing. It announced that it was trying to destigmatize the discount window. And then after the fact, you had banks that were immediately suspending any sort of share repurchases in the future.

So this was a colossal meeting. And what we saw from the Fed minutes was that the economic conditions were really deteriorating, which is why Chairman Powell called that emergency meeting in the first place. So a few bits from the minutes is that they did note that the US economy entered the coronavirus on a strong footing.

But all the participants said they saw conditions deteriorate sharply during the recent weeks leading up to that March 15th meeting. You had participants saying that business sectors, foreign economic growth were, quote, "badly hit."

But I want to emphasize not everyone was on board with slashing rates to zero. We do know that Cleveland Fed President Loretta Mester actually only preferred a 50 basis point cut, as opposed to a 100 basis point cut. The minutes revealing that a few participants agreed with that decision, meaning she wasn't necessarily the only one. We just know about that because she's a voting member.

A few other things worth mentioning in the minutes, you had several participants commenting that banks should not be doing any sort of capital distributions like share buybacks, which the banks ultimately ended up doing after that decision. But some of those participants also said they would prefer that the banks actually not do dividends as well. That's been a pretty contentious thing as the banks are still planning on paying out in dividends.

Lastly, the Fed said that communication was going to be a big issue, a lot of members of the committee saying they wanted to emphasize that they could still provide monetary accommodation, despite reaching the zero balance, alluding to the forward guidance, the quantitative easing changes, and the liquidity facilities that it shortly announced after that March 15th meeting. But plenty to digest. Again, the Fed is trying to say and trying to message it still has ammo left.

MYLES UDLAND: Now Brian, we're going to hear from Chair Powell tomorrow morning for the first time in a couple of weeks. And I think what's interesting, or what I think I would like to hear him answer is, you know, a lot of the minutes-- and remember, as you noted, these are pretty dated now.

But it jumped out to me that there was a line that several participants emphasized the temporary nature of the shock and basically said because it was an out of the blue economic impact as it were, on the other side, there should be a quick rebound in activity.

Now this is really the debate happening on Wall Street. I think the market is a little bit more bullish on that quick rebound than maybe mainstream economists are. And I would be curious to see where Powell kind of shakes out on that debate right now because I think as we were kind of talking at the top of the show, like, we all know how bad everything was, how bad March and April are going to be. The debate now is really about what happens in the future.

BRIAN CHEUNG: Yeah, and I think what Chairman Powell is probably going to say might not offer too much light into where he lands on that spectrum, as you've nicely laid out. Chairman Powell has basically been pretty clear in saying that this really all depends on the health response, and the actual minutes clarify that as well.

There were concerns among the participants that the US health care system would not be able to withstand the shock, and that could ultimately make an argument against a V-shaped recovery if you just can't contain it. And we still don't really exactly know where that is. As we know, over the past three weeks, the actual kind of thought progress on whether or not we will be or will see a V-shaped recovery is continuing to change.

So Chairman Powell and other Fed speakers, which you've heard from in the past-- we had Mary Dailey on Yahoo Finance last week-- they've all been saying this really depends on the health response. So here you have the Federal Reserve minutes, which a lot of people say, oh, we're just trying to pay attention to the monetary policy implications here, they're all pointing to a health response.

And none of these people who are on the FOMC are epidemiologists or really kind of have the knowhow to know exactly how we can predict the virus to end up in the United States. So these are all unknowns that really ultimately at the end of the day factor in as uncertainties, which is why, you know, economists speak basically for we're just going to provide a forecast out here. But you have to understand that the confidence interval is extremely wide here.

So Chairman Powell, again, he's going to be speaking with the Brookings Institution tomorrow at 10:00 AM, very closely watched. But again, I think he might be a little vague on where he lands specifically, just trying to say broadly that it's really on probably federal policymakers up on Capitol Hill to determine where we go from here.

MYLES UDLAND: All right, Brian Cheung with the latest on the goings-on from the Fed. And again, as he mentioned, Jay Powell will likely-- or likely-- set to speak tomorrow morning, 10:00 AM Eastern, on a Brookings Institution webcast. Of course, we'll follow all of that live for you here on Yahoo Finance.