July 24, 2020

Stock Market Crash: Stock Rally is Out of Gas

The current coronavirus stock market rally has been dubbed the most hated stock market rally in the history of financial trading. Despite the stellar rally we’ve seen from the U.S. stock market, speculators believe that this stock market rally will crash once it runs out of fuel; in other words, when it runs out of fiscal and monetary policy support. 

Pessimism about this stock market rally is nothing new; we heard this message echoed in 2007 during the financial market crisis. Some stock investors didn’t believe the U.S. stock rally, and what happened? Just before the Covid-19 turmoil, we had the most extended bull rally in history.

The Pill to Save the Stock Market Crash 

Stock market crashes do happen. The question is, what will lead the stocks to crash this time, or at least revisit the levels experienced in March this year?

One of the stock market crash signals may come as early as the end of this month when the U.S. jobs benefit program expires. Congress is currently discussing the second stimulus, and a favorable outcome is unlikely before the deadline. This is because Democrats and Republicans are in a deadlock situation. The negotiations do not seem to be going anywhere. 

Stock Rally Running Out of Gas 

Without another stimulus support, the U.S. stock market will be like a car without gas, especially under the current circumstances. This week, we have not seen much progress in the Dow Jones’s index, and the Dow’s price remains within the previous week’s highs and lows. This shows that traders aren’t certain about the Dow’s bullish trend, and there are genuine concerns. 

The S&P 500’s index price has exceeded the previous week’s high, giving the bulls some confidence. The chart below shows the S&P 500’s weekly price. 

Earnings Have Mixed Message for Stock Rally 

In terms of the earnings season, so far, most Wall Street stock has beat their estimates. Another clear message companies have been reporting so far is that although the worst may be behind us, the future is still uncertain. This uncertainty means a more prolonged recovery path for the U.S economy, the U.S labor force, and consumer spending. All of this could trigger another stock market crash. 

U.S.-China Tensions 

Geopolitical tensions between the U.S. and China are on the rise, and there are no signs of either side backing down. The Trump administration is trying to pressure China. Beijing wants the U.S. to understand that China has the second-biggest economy globally, and the U.S. can’t always have its own way. The message is clear; China isn’t willing to sit quietly and do nothing. If these tensions continue to escalate, there is a strong possibility that it might incite a stock market crash that may not be contained by stimulus measures. 

Only One Bullet Left to Save Stock Market Crash 

Previously, the Federal Reserve supported the stock market crash via its loose monetary policy. This time, the Fed has started to buy corporate bonds—something the Fed has never done before. This Fed move has saved this stock market crash, but it has only one bullet left now–apart from pushing the interest rate below zero—which is buying stocks the same way it did with U.S corporate bonds.