Watching the Blue Chip Dow Jones Industrial Average lose 730,05 points today to end the session at 25,015.55 stokes fears in investors that the Bear Market Covid-19 rally is starting to crumble, giving way to more short-sellers, where hedge and private equity funds start betting against the market. When the market topped off Feb. 12 at 29,551.42, the coronavirus crisis was only beginning to douse Wall Street with cold water. Dow Jones continued to deteriorate until March 12, hitting a bottom at 20,204.19, one day after World Heath Organization [WHO] Director-General Tedros Adhanom Ghebreyseus declared a global cooronavirus pandemic March 11. Since that bottom Wall Street crawled back up the mountain after losing 39% of its value, hitting 27,110.98 June 5, then watching the Dow Jones Average move sideways, closing at 25,015.55, blaming the sell-off on an upsurge in Covid-19.
Market averages following the Dow, including the S&P 500 and Nasdaq Composite, also hit a record high June 9, climbing to near 10,000, ending the session at 9,953.75, over 200 points above today’s close of 9.757.52. All major averages went sideways when new waves of Covid-19 prompted Texas Gov. Greg Abbott to shutdown bars again, noting the spike in SARS CoV-2 cases largely in the under-50 population, frequenting bars and nightclubs. More than Covid-19, Wall Street is beginning to digest news that economic recovery won’t come easily, in fact could take several quarters, a far different picture than given by 74-uyear-old President Donald Trump. Trump hopes the economy can redeem itself in the Third Quarter, something dubious by the slow reopening pace. With bankruptcies and mortgage defaults rising, Wall Street does eventually process the bad news.
All the optimism about reopening the economy has now given way to the reality that 67-year-old Federal Reserve Board Chairman ordered banks to perform stress tests, stop buying back stock to maintain share prices. Share prices have begun to decline due to inflated price-to-earnings multiples, based largely on funds buying on dips over the last three months. But with short selling dominating markets, it’s clear that the Covid-19 rally, based largely on optimism, not on earnings, couldn’t sustain itself. Restricting dividend payments and stock repurchases, Powell believes the nation’s biggest banks must be ultra-cautious in a time of economic upheaval. Powell said June 10 that the Federal Funds Rate would remain at zero for at least two years, signaling to Wall Street that things are much worse than Bear Market Covid-19 rally indicates, starting a new wave of sell-offs.
Powell wants to avoid what happened in 2008 during the Great Recession where some of the nation’s biggest banks and brokerage houses ran out of cash. Any run-on-the-bank could trigger panic selling further eroding confidence in the markets. Markets also continue to digest news that Trump isn’t likely to get a second term, prompting Wall Street to consider what taxes and regulation would be like under a Biden administration. With Biden surging in the polls in swing states, it’s starting to look like Trump won’t get a second term. Polls show that most voters don’t like Trump’s management of the Covid-19 or George Floyd crises, looking for a change in 2020. Faced with more upheaval, voters want stability over chaos, looking for normalcy again. Whether improved Covid-19 or racial tensions, there’s no guarantee that a Biden victory would translate into stability on Wall Street.
When investors heard that Apple Inc. would close dozens of stores in Florida and Texas and Disney theme parks and cruises would delay reopening, investors realized that earnings would not return anytime soon. Spikes in infections in Florida, Texas, Arizona and California put the breaks on any rally heading into a long weekend. With real estate also in a slump nationwide, there’s little bullish sentiment on Wall Street, though that tends to change daily depending on the news. But if investors pay any attention of nonpartisan economists like 61-year-old Allianz SE chief adviser Mohammed El-Erian, investors should stay clear of Wall Street until there’s more certainty for long-term investors. Fed Chairman Powell said, unlike the 2008 Financial Market meltdown, the Covid-19 crisis is not easily fixed by monetary or fiscal policy. Powell urged Congress to create more stimulus.
Fed Chairman Powell doesn’t usually ask Congress to help Fed offset the adverse economic impact of the coronavirus crisis. Powell has already slashed interest rate as far as he can, as he considers another round of Quantitative Easing or bond buy-backs. Powell thinks more stimulus is needed to spur consumers on to spend more into the consumer economy, something that prompted a 17% boost in retail sales June 16. But with unemployment still rising to over 15% nationwide, there’s little hope for consumers to bail out the economy without more stimulus. Trump and House Speaker Nancy Pelosi announced a desire for another round of stimulus sometime in July, something that could prompt another Wall Street rally. Until the economy gets more guidance from the coronavirus, markets can expect more sideways action, as funds play more defensive strategies like short-selling.
