by Timothy D. Carkin, CAIA, CMT
Senior Vice President
In recent months, stocks have experienced an impressive rally, resulting in many commentators and analysts creating new and unusual analogies. This week, our favorite is “the market’s new coffee table.” In March, the market bought a brand-new coffee table to be the focal point of the room. Regardless of the aging state of the existing furniture, the coffee table makes up for it. However, one night the market might confidently walk shoeless into the room and BAM! stub its toe on the beloved new décor item. There would be instant pain, cursing, and the immediate feeling of regret in the purchase. While the initial pain will pass, the lingering ache will shade every piece of news that comes after.
That reality took place this week as the market stubbed its metaphorical toe on Thursday when it registered the worst day in the stock market since March. It was bound to happen. Investors have been walking around without shoes as the NASDAQ rallied nearly 50 percent and set an all-time high. The S&P 500 traded at nearly 13 percent over its 50-day moving average, something that has only happened three times post-WWII, per Strategas. The toe-to-table moment came over the last few days as COVID-19 second wave fears surged, dovish Fed comments pushed the bulls out of the market and stocks fell nearly 6 percent. Investors shrugged off good news, such as initial unemployment claims continuing to lower, something that was cause for a rally a few weeks ago. Instead, dovish comments from the Fed amplified news of increases in new cases and hospitalizations in the southern U.S., with some states showing 30-to-40 percent increases. But as with a stubbed toe, we need to wait till the pain subsides to rationally judge if the damage is as bad as we first thought. We have to remember that a second wave of the novel coronavirus has always been a concern as we continue to watch to judge its effects on the markets and economy.
Fed’s Glass is Half Empty
The words from the Fed and Chairman Powell haven’t changed much in the last few months but investors are starting to listen. Interest rates were held steady at near zero in the Fed’s June meeting and look to stay that way through 2022. In the press conference afterwards, Chairman Powell emphasized that by saying, “We’re not even thinking about raising rates. We’re not even thinking about thinking about raising rates.”
Even with a stellar May jobs report and decreasing unemployment claims, Powell’s “glass half empty” report has darkened hopes for a quick economic recovery. The Federal Open Market Committee also confirmed its asset purchases at current levels of $80 billion in U.S. Treasuries and $40 billion in mortgage-backed securities a month. Functionally, this is a bridge to get through the summer - the Fed wants to wait for more visibility before making a call on next steps at their meeting in September.
The equity market’s coffee table remains, and there are still more chances to stub toes if the Fed’s prediction for the economic recovery are correct. Historically, investors make bad choices when they “stub their toes” and the pain of selloffs are fresh. However, it’s our job to remember where the coffee table is the next time the lights go out.
Week in Review and Our Takeaways for the Week
Thursday recorded the worst day for equities since March, moving markets out of their overbought position
The market hasn’t fully digested the dovish outlook from the Fed and its second wave fears