Did the market get ahead of itself?

Tech stock sell off

Stocks select reverse gear

U.S. and global stocks went into free fall on 11th June 2020 as the Dow recorded a 1800 point drop in one session, and as investors mull COVID-19 spikes, the Fed’s outlook and jobless claims data. The Fed promised it will keep interest rates low until 2022. Now this type of statement is usually music to Wall Street’s ears, but not this time, as markets unravel.

Outlook not looking so good

Did the market get way too far ahead of itself and is it now reacting to the Fed’s gloomy economic projections and fears of a second wave of infections and have we truly dealt with the first wave yet!

Usually, or for the last decade at least and since the 2008/2009 financial crisis, a dovish Federal Reserve would help boost risk sentiment. But we are in different times now and however ‘helpful’ monetary policy remains, the market will likely always need more.

The market is hooked on ‘easy’ money, like painkillers to a headache. It’s almost a given that central banks will intervene, and markets know this. As the Federal Reserve says it is committed to keeping rates at zero all the way through 2022, stocks sell off!  

Federal Reserve
Federal Reserve

Negative?

The Fed’s negative assessment of the U.S. economy and jobs market, combined with expectations for a slow recovery, left risk assets looking very exposed after a big run up. And they took a hit yesterday, 11th June 2020.

U.S. stocks pull back

Stocks in the U.S. experience a drop on 11th June 2020…

The Dow down 1862 point to close at: 25128

S&P 500 down 188 points to close at: 3002

Nasdaq down 527 points to close at: 9493 after breaking through 10,000 and setting a new record high just the day before!

European stocks pull back

Stocks in Europe slipped back too and have extended losses since. Asian shares fell yesterday as they followed Wall Street down. However, gold rallied to $1735. 

Stocks fall
Stocks pull back

Investors may now see a slower recovery taking place and the possibility of lasting damage to the economy. But sadly, with all the stimulus sloshing around in the markets, investors will likely chase stocks up again soon.

FTSE 100 down 252 points on the day to close at: 6077

Dax down 560 points on the day to close at: 11970

Assessments for the economy are grim

The Fed forecast the U.S. economy to contract by 6.5% in 2020 and for the unemployment rate to be above 9% by the end of the year.

This would be an improvement from the current rate of 13.3%, but it clearly points towards a protracted drawn out recovery path.

U.S. Unemployment is still projected at 6.5% through 2021. Faced with this, Jerome Powell said he is, ‘not even thinking about thinking about raising rates‘. Oh my!

And as many have warned, some of the damage will be permanent, meaning a significant productivity pull back. The Fed chair also said, ‘My assumption is there will be a significant chunk, million, who don’t go back to their old jobs.’ Shocking!

Is the V-shaped recovery theory now dead?

Gloom

Gloomy Fed forecasts coincide with the OECD’s negative outlook for the UK. It said the UK economy will contract 11.5% in 2020 even without a second virus wave.

Lockdown GDP

Second wave worries are another factor dragging stocks down, particularly as we see rising numbers of Covid-19 cases in several U.S. states like Texas, Florida and California, where hospitalisations are rising again. The U.S. recovery will be slow.

The UK too has a long slow journey to recovery. Strap yourselves in for a bumpy ride – it’s truth time.

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