WASHINGTON – Irrational exuberance usually comes to an end. But unfortunately, negative trading action that accelerated after Wednesday afternoon’s Fed report returned Thursday to hit both stocks and bonds with a vengeance. Bulls watched stocks erase recent gains in a massive, bloody, post-Fed Thursday market crash. It may turn out to be the biggest market downturn since the March 18 debacle earlier this year.
As of 1 p.m. ET, the Dow Jones Industrials are off a horrific 1500 points or thereabouts, for a whopping 5.5 loss on the day thus far. The broader-based S&P 500 is nearly as bad, off 146.80 points for a daily loss of nearly 4.6% thus far. And even stocks in the stalwart, tech-laden NASDAQ are forming a line for the selling guillotine. The Nazz is currently of a sickening 410 points for a loss of 4.07%. This Thursday market crash is likely to completely halt investors’ portfolio repair activities. At least for a time.
What we see today in market averages are killer numbers. Right now, there’s no sign that we’ll get anything like a substantial bounce near Thursday’s close. And worse, with the weekend close at hand, we may get significant downside follow-through Friday. That would make bullish investors just as miserable this weekend as they were irrationally exuberant last weekend. So it goes.
What’s behind this huge Thursday market crash?
So why Thursday’s horrendous waterfall decline? CNBC opines.
“Stocks fell sharply on Thursday as coronavirus cases increased in some states that are reopening up from lockdowns. Shares that have surged recently on hopes for a smooth reopening of the economy led the declines….
“Shares of United Airlines, Delta, American and Southwest all dropped more than 9%. Carnival Corp. and Norwegian Cruise Line shares fell more than 14%. Gap and Kohl’s shares traded lower by 9% and 10%, respectively.”
A couple pandemic favorites have fared better, at least as of this writing.
“Netflix and Zoom Video — two stocks that have benefited from consumers staying at home during the pandemic — rose 1.8% and 3.4%, respectively, clawing back earlier losses.”
Maybe it’s all because, coronavirus…
The network’s online site elaborates a bit on its coronavirus panic theory.
“Concerns about a second wave of coronavirus cases have risen as U.S. states push deeper into reopening. Texas has reported three consecutive days of record-breaking Covid-19 hospitalizations. Nine California counties are reporting a spike in new coronavirus cases or hospitalizations of confirmed cases, AP reported Wednesday.”
Is today’s market crash the fault of red states releasing citizens from coronavirus house-arrest too early?
I’m not really so sure about this rationale. The media is desperate to show that red states in particular – the ones that have dropped most restrictions on businesses and individuals – are being punished for their foolishness and naiveté. So vote Biden. It’s the narrative. And you can’t bother these overpaid, blow-dried (except for little Brian Stelter) cable TV circus performers with facts or nuance.
As in Texas’ repeated declarations that their Covid-19 reports and likely cases are substantially increasing in major part due to the extensive testing that state’s citizens have been undergoing. This naturally increases number of confirmed cases because, well, they’re being confirmed. Whereas before, many cases went unreported, especially those where the victim exhibited no symptoms at all.
But the high-speed trading machines react instantly to hyped reports, whether good or bad, buying and selling mass quantities of stocks accordingly. So, could there be another reason?
Maybe this market crash is due to a poorly received (but actually reassuring) Federal Reserve report
A more likely cause of the current market rout is the Federal Reserve. Yesterday, Wednesday, the Fed issued its usual monthly report, and Fed Chair Jerome Powell followed with a presentation, itself followed by some Q&A. I thought that the report was reasonably optimistic, in that the Fed promised to keep interest rates low nearly forever. But that’s not the way the media reported it.
ZeroHedge – a site whose business and political commentary we generally enjoy and often rely on – exhibited its talent for amping up bad news in a Thursday morning commentary by the Twin Tylers. (Bold and italics via ZH.)
“The Fed statement and Jay Powell’s downbeat press conference are acting as a powerful curb on the hope-filled (and extremely rapid) allocation shift that had been unfolding in recent days.
“In general terms, the meeting ended with the dovish outcome of continued monetary easing measures and a cautious stance on the economy. However, recent positive surprises in the incoming economic data had led some quick-footed investors in particular to start adopting an optimistic take on the economy.”
Rampant speculation by naive millennials to blame?
The main problem ZH alludes to above is actually a real one. It’s a piece of the recent market action that’s happened beyond the hype. Mainly, we see the apparent mass movement of newer (and more naïve) investors into speculative stocks. (ZH thinks this trading activity is particularly evident at upstart online brokerage site Robinhood. We intend to follow up on this in a future article. ) These include new companies with blank profit track records. The list also includes companies like battered airlines, cruise lines and other travel related shares.
Travel-related shares was driven up, last week in particular, by a powerful wave of panic buying. As if to say that these companies, including the eviscerated airlines, would be back absolutely coining money and profits by August at the latest. Yeah, most of them will come back, perhaps with government help. But they’ll be lucky to reach even a break-even point by sometime in 2021.
BTW, ZH thinks this speculative trading activity is particularly evident at upstart online brokerage site Robinhood. We intend to follow up on this in a future article.
The economy will defy predictions. But it won’t go straight up
I believe the economy will indeed defy both the fears and predictions of the usual cable suspects and end up flying upward on cruise control this fall. Dashing – big surprise – the disaster scenario that America’s minions of Satan (hat tip to Bill Still) have cooked up on numerous fronts in their never-ending effort to wipe out President Trump in Election 2020.
But these events are yet to come. What may have happened last week is that some institutions – plus a legion of naïve younger investors with no experience in getting wiped out in a New York minute – may have bet too much on an instant economic recovery. Indications are we’ll get a fast recovery. But the details can take some time. And the most badly damaged stocks will take the longest to come back.
At any rate, we are where we are. And it looks like the bulls will need to pull out their hidden caches of anti-depressants in order to endure the weekend.
Doing triage on our portfolios
As for us, we’ve pulled out a great many of our more speculative positions today – nearly all for a profit, thank the Lord – but we’re not doing much buying right now, even though, given the red ink, it might be a good time. Problem is, the bears reappeared with a vengeance today, and pulled the rug out from under the bull argument.
Damage like we’re witnessing this week takes a bit of time to heal. And it may scare some of those new speculators – particularly those trading through upstart site Robinhood – away from close encounters with Mr Market entirely.
– Headline image: Wile E. Coyote’s portfolio is doing as badly as everyone else’s
as coronavirus panic and post-Fed report blues terrify stock market investors in Thursday market crash.
(Warner Bros classic cartoon image, reimagined for satirical purposes. Fair use.)