Stock Market Crash: Are We In For A Rough Ride?

The U.S. stock market rally has started to show some serious cracks, and it appears that this coronavirus stock market bubble could soon burst. This is despite the fact that the Federal Reserve in the U.S. confirmed yesterday that it is going to keep the interest rate at the current level until 2023. If the Fed’s 2023 vaccine—meaning keeping the interest rate at their current level for three years— isn’t going to work, the question is what will work, and what can save this stock market rally?

Dow Jones, S&P 500 Turned Negative For YTD

The Dow Jones Industrial Average is firmly trading in negative territory, and it is currently down by 1.77% year-to-date (YTD). The Nasdaq NDAQ Composite, also known as the tech-savvy index, has started to lose its ‘mojo’. It is now in correction territory as it is down over 10% from its recent all-time high. Another 10% selloff will push the Nasdaq into bear territory. For now, the index is still up 28% YTD.

The S&P 500, which is a better representation of the overall U.S. stock market, is barely keeping its head above water. Effectively, it is struggling to stay positive for this year, and it is down approximately 6% from its all-time high. 

What is Economic Data Telling Us?

The most important number for the U.S. stock market and the Federal Reserve is the U.S. jobs data. Today, we had the U.S. Jobless Claims data. The data confirmed another move in a better direction. Seasonally adjusted Initial and Continuing Jobless claims have recouped almost half of the pandemic job losses. 

Today, the Jobless Claims data showed that 860,000 Americans filed for unemployment claims. This number matched the market forecast. However, the slowdown pace for jobless claims has slowed, which could make the current selloff even worse. 

What Has Triggered The Stock Market Crash?

The Federal Reserve’s monetary policy has supported the U.S. coronavirus stock market rally. Since the coronavirus pandemic, the Fed has cut the interest rates, and currently, they are at an all-time low—near zero. In addition to this, the Fed restarted its asset purchase program in order to boost liquidity. In the Fed’s landmark meeting yesterday, the Fed pledged to keep the interest rates at their current level for another three years. The market expected this move. 

The stock market has started to crash because the Fed maintained its uncertain outlook for the U.S. economy. Fed Chairman, Jerome Powell wasn’t confident about a strong economic recovery. This is despite the fact that Donald Trump, President of the United States, has said that a coronavirus vaccine will be here very soon. 

The general consensus in the markets is that a potential Covid-19 vaccine can be here before the end of this year. If this becomes a reality, surely, it will only be positive for the U.S. economic activity. So, why isn’t the Fed that optimistic about the future of the U.S. economy? This is one of the reasons that we are seeing the stock market meltdown. 

Another school of thought is that the market participants will just never be pleased; they have become way too greedy. There were some speculations that the Fed would announce further support measures, given that there are still over 13 million people still unemployed. The Fed confirmed their support but didn’t indicate any further easing of its monetary policy. 

 

What Can Save This Crash?

Speaking from a price action perspective, the U.S. stock market rally has shown us its first warning sign this week. All three major stock indices, the Dow Jones, the Nasdaq, and the S&P 500, have moved below their 50-day SMA on the daily time frame. 

We must see these indices moving above these averages for this stock market rally to display its original strength. 

From a macro perspective, I am still hopeful that a potential coronavirus vaccine can change the game, and the current selloff is more of an excuse for a healthy correction. We still have hopes for another stimulus package from Washington, and any help from the fiscal side can improve the pace of economic recovery in the U.S. and stop the U.S. stock market from a crash. 

Key Economic Catalyst 

  • First US election debate— Sep 29
  • Deadline to fund U.S. government— Sep 30
  • AstraZeneca aiming to release first vaccine doses — October
  • FDA / Vaccines and related biological products advisory committee holds open session- Oct 22
  • Moderna, Pfizer announce Phase 3 vaccine results— Expected November
  • US Elections— Nov 3

Bottom Line 

The U.S. stock market has lost its strength. Despite a well-telegraphed message, the Fed has failed to keep the market calm. It is likely that this coronavirus stock market may continue its downward move until we get some good news on the coronavirus vaccine front.

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