As we’ve seen this year, the stock market can be a volatile beast.
Throughout January and February, the stock market continued its gradual ascension, breaking one new all-time high after the next. But then the global COVID-19 pandemic hit. From Feb. 24 to March 23, in less than one month, the major stock indexes hit a punishing decline. The S&P 500 fell 33%, the tech-heavy NASDAQ 28.4% and the Dow Jones Industrial Average (DJIA) 35.9%.
Since the low point of the pandemic-induced sell-off on March 23, the stock market has been on a five-month surge. From March 23-Sep. 2, the S&P 500 gained 60%, the DJIA 56.5% and the NASDAQ a massive 75.7%. Both the S&P 500 and NASDAQ reached new all-time highs while the DJIA fell just 1.6% shy of its record high set back on Feb. 12.
There are a number of factors that have contributed to this historic rally. Back in late March and early April, Wall Street realized the U.S. economy wouldn’t get that worst-case scenario that many initially feared. Yes, the economic fallout would be drastic. But at least the American economy wouldn’t be shut down for 9-12 months, or even longer.
Second, we saw the transitory shift that technology would have in our work and daily lives. Not only has this technological shift helped lessen the economic impact of government-imposed business closures and quarantines, but it has also sent the stock prices of many tech companies soaring — which has helped drive the broader stock market higher. Finally, we continue to see growing evidence of a very strong economic recovery.
But on Tuesday, the stock market ended a three-day slide that triggered the latest concerns on the sustainability of this current rally. After the dust had settled, the DJIA had fallen 5.5% and the S&P 500 had declined by 7%. The NASDAQ, with its abundance of technology stocks, lost 10%. The three-day sell-off marked the NASDAQ’s fastest 10% decline in market history.
Whether this sudden pullback represents a temporary pause in the ongoing rally or implies a deeper concern is being heavily debated on Wall Street. Some point to the very strong rebound in the U.S. economy and labor market and contend this is simply a minor setback on a continuing path to higher stock prices. Thus, they argue, a rising stock market simply reflects the optimism of a quick recovery.
The other side of the argument is that the economic damage caused by the COVID-19 pandemic is simply too great and will take several years to fully recover. Consequently, the stock market rally was probably a bit too optimistic given the uncertainties of the COVID-19 virus and the upcoming presidential election.
Regardless of which side of Wall’s Street’s debate you believe, with stock prices so high, it doesn’t leave a lot of room for error or setbacks in the economic recovery or path of the COVID-19 pandemic. Even though we should expect a strong economic rebound in the second half of the year, many complex challenges and unknowns still lie ahead. And as history points out, this uncertainty typically leads to further volatility for stock market investors.
Mark Grywacheski spent more than 14 years as a professional trader in Chicago, where he served on various committees for multiple global financial exchanges and as an industry Arbitrator for more than a decade. He is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.
Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.
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