Despite Republican and Democratic leaders giving a nod of approval to a $908 billion coronavirus stimulus and relief package, the U.S. stock market was more concerned over a new coronavirus strain in Europe one year after the first COVID-19 case was reported. Global financial markets may have been given a glimpse into what another COVID-induced crash in the equities arena could look like – and it is not beautiful. If the first generation of vaccines turns out to be ineffective in fighting against this strain, are investors in store for another bloodbath on the New York Stock Exchange? Fasten your seatbelts. It’s going to be a bumpy night.
A December to Dismember?
It was supposed to be a day of green. It was supposed to be the beginning of another rally. It was supposed to be a special gift from Santa Claus heading into Christmas. What happened? Baby, it’s volatile outside. It was worse than receiving a lump of coal in your stocking – or brokerage account.
The Dow Jones Industrial Average kicked off the first session of the holiday-shortened trading week down about 400 points, but then it experienced a several-hundred-point U-turn, only to finish the Dec. 21 session in the red by 100 or so points. The Nasdaq Composite Index and the S&P 500 were each down about 1%. Crude oil prices had their worst single-day performance in about a month, while gold could not ignite an explosion, despite being a conventional safe-haven asset in times of chaos.
Only two assets performed well: silver and the U.S. dollar. While the white metal had topped $28 in the Asian trade, it plunged to below $25 and then ended the day in the green. The U.S. Dollar Index (DXY), which measures the greenback against a basket of currencies, performed better than it had been as of late as investors sought refuge in the good old buck. Still, the dollar has crashed about 16% since hitting a peak of 103.00 and it will finish the year down 6-7%.
Investors were apprehensive about buying and selling, with the leading indexes trading relatively sideways. Until good news is reported from the United Kingdom, this might be a glimpse of what to expect should the coronavirus either worsen or the vaccines prove to be as disappointing as a Christmas sweater against the new strain.
Don’t worry! The Federal Reserve will come to Wall Street’s – and the world’s! – rescue.
Fed’s Magic Carpet Ride
One of the reasons why the market crashed as hard as it did earlier this year was because the U.S. central bank chose to sit on its thumbs on the sidelines. The Fed repeatedly stated that it would not cut interest rates or start employing appropriate measures. Well, “beware the ides of March,” as William Shakespeare penned, because the Eccles Building came off the bench and sprang into battle, unleashing unlimited quantitative easing (QE) and slashing rates to nearly zero. Chair Jerome Powell made his predecessors – Janet Yellen, Ben Bernanke, and Alan Greenspan – look like Austrians.
This provided the Fed with trillions in liquidity, making everyone on The Street feel safer and more confident about leaping into equities and options. It was essentially insurance against trading losses. Everyone could borrow at ultra-low rates and receive a cash injection to buy index funds and add to their positions in Apple, Amazon, Netflix, Zoom, and Tesla.
The market bottomed on March 23, and here we are today: stocks and indexes sitting at all-time highs. Could 2021 be a repeat of 2020? Not if Powell and Co. have anything to say about it.
Hindsight Is 2020
If Pfizer or Moderna were to come out and say that its treatment is now useless against this mutation, you could expect a massive selloff on the Dow Jones, NASDAQ, and S&P 500. Investors might even cash out and take their incredible profits from when they slammed the buy button at the height of the first wave of the public health crisis. But financial markets are unlikely to dive off a cliff like what occurred in March 2020 because they have a friend in the Federal Reserve and its crate of magic beans inside the Eccles Building’s basement. Until the ink runs empty, the printing press will be running 24/7 to rescue Main Street and Wall Street from the ashes of destitution. Should the ink run out and the machine stop working, Powell will give the economy permission to die.
Read more from Andrew Moran.