Remember, the famous saying ‘Do not fight the Fed?’ Investors and traders have engraved this expression into their trading plan. The stock bubble could continue for a while longer.
Are Stocks Going Up or Down?
The Dow Index is up 42% from its Covid-19 crash, and the Dow price is near its 100-week average price. However, the S&P 500 index, which is a better representation of the overall stock market, is also up 46% from its coronavirus stock market low. The S&P 500 index is trading nearly six percent higher than its 50-week average price—this confirms that traders are not only buying stocks but are comfortable holding their long positions.
How is the Stock Market Crash Saved?
The Fed has acted fast since the outbreak of the pandemic. It lowered its interest rate and started its famous asset purchase program to boost liquidity in the U.S. economy. The interest rates are at a record low now due to coronavirus.
This week, we had the Federal Reserve meeting about their monetary policy. The Fed has left the interest rate unchanged—something that was anticipated. However, Jerome Powell, the Fed chairman, has assured that the Fed is not in the mood to raise the interest rate anytime soon.
The stock market was waiting for this confirmation. In addition, the Fed extended its U.S. dollar repos and swap lines until the end of March next year, which is further confirmation of the Fed’s support for the economy.
The concern is that the Fed is running of ammo, which is something investors are paying close attention to. The stock market bubble is running out of gas.
What Could Trigger the Stock Market Crash?
The Federal Reserve’s action can’t keep the coronavirus stock market rally going on its own for much longer. It needs help. In other words, it needs another stimulus injection—in trillions of dollars. So far, the mixture of fiscal and monetary policy support has worked well.
The issue for the stock market and traders is that policymakers are too busy playing games. There are still no final results on the stimulus bill, which is why U.S. stocks haven’t experienced a massive boost.
The second stimulus is almost a done deal, and I think in the coming days or weeks, we will receive it, but the bigger question is whether it will be enough.
In my opinion, there could be some small mini-packages after this because the first one didn’t last long. The U.S. elections will take place this year, and the stimulus support for Americans and U.S. companies could help Trump win the election.
Trump is actively promoting the idea that the U.S. elections should be delayed due to coronavirus—although he doesn’t have the power to enforce such an action.
Delaying the election would create uncertainty. If faced with uncertainty from here on out, it is likely that traders would step away from riskier assets leading the stock bubble to deflate.
A Major Concern for Stock Market Rally
A significant concern for the stock market is the rolling over of U.S economic data. This weeks’ initial jobless claims increased once again. This is the second time in a row we have seen the initial jobless claims soar.
Moreover, we also had the second-quarter U.S. GDP number plunge by 32.9%. This kind of U.S. GDP plunge hasn’t been witnessed before, even during the Great Recession or the Great Depression.
The stock market could face retracement, and that is because it is running out gas, but a full-blown market crash may not happen anytime soon.