A Second Stock Market Plunge?
The surging markets do not reflect the economic realities.
Historically, stimulus packages from the Fed have proven to be a lifeline in depressed or recessional environments. This time there is something different. The markets are showing remarkable growth and stability in the wake of multiple stimuli thrown in by the Fed. But what is happening outside of the markets is astounding. Historically high joblessness, thousands of businesses gone bust, 100k+ lives lost, massive riots throughout the US because of George Floyd’s alleged killing by police officers. Amid all this, “the S&P 500 index completed its best 50-day run in history on Wednesday, June 3, 2020 according to LPL Financial…”
The El-Erian opinions
There cannot be stranger times when the macroeconomic conditions do not match market performance. I feel this has gone too high too fast. Famous economist El-Erian compared the current efforts by the Fed to a poker player going “all-in”. Going all-in could mean you come out victorious or not. If victorious, that’s good, but if you do not, you cannot come back to play since this was a one-off one-time game. So, here’s the Fed, going all-in, unaware of whether it will be a win or a loss. If lost, they cannot come back. If won, well nothing better than that then!
In another instance, El-Erian also identified risks that we face today in the markets. One of them the markets being an aberration. Aberration – the economy is not picking up that quickly. Actual recovery may be a long and slow growth as opposed to a sharp V.
If this is really an aberration, be prepared to put in intelligent Stop Losses. Spare up as much cash as possible. There cannot be a better time to invest than a downturn in the economy. Cash is king in such times. Both because it is required in case of emergencies, and also because cash is required to invest when the market is down and you can find loads of good bargains.
Additionally, if suddenly, Congress is unable to pass bills related to additional stimuli, there could be trouble ahead. There is one main reason leading to such a decision. The Feds see that the markets are growing, stabilizing and performing way beyond expectations and therefore the economy does not need new stimuli even in the face of grim macroeconomic realities like +13% joblessness, massive protests in the country against racial discriminations, and no stop in sight for a quickly spreading virus for which no vaccine has yet been produced.
In April, Forbes published an article “Stock Market Crash: Party Like It’s 1929” in which one image really caught my eye:
