Much of the excitement that fueled the rise in equity markets has fizzled out on a recent downbeat and neutral news on the Coronavirus development.
From its March lows, the NASDAQ 100 has returned 83.26% from its peak at the start of September. This legendary market rally came from Jerome Powell and the Federal reserve’s loosening monetary policy in March. However, Powell’s dovish stance yesterday, hinting that he is willing to keep rates near zero till 2023, has made traders and investors realize to support these lofty valuations, even in tech stocks, we will need more positive developments regarding the Coronavirus.
Market indices have retracted on lofty valuations from its peak in early September, with the NASDAQ 100 retracting 10%. The Bank of International settlements attempted to quantify how much of the rally this year has been driven by rate cuts, and they estimate that “close to half and a fifth of the rebound in the US and Euro area” were due to the rate cuts.
The problem regarding the equity markets is interesting. If there is no good news regarding the Coronavirus (vaccine, decreasing Coronavirus), the Market won’t do anything. However, if the Fed does not provide a “more than expected” dovish stance on their meetings, the Market will assume accommodative environments will disappear, forcing a sell-off. Simply put, the Market wants good world conditions, alongside accommodative financial conditions. We currently are in the best accommodative conditions for equities, which is a larger factor than the global conditions. Any improvement in the global environment will see the Fed cut back on accommodative policy, possibly hurting equity prices.
Central banks back the idea that low rates spur asset prices upwards – an intended consequence in monetary policy. However, this year’s rally is something that central bankers don’t want to admit they were responsible for, mainly because they don’t want to validify the Powell “put,” instilling excessive risk in investors mind.
Currently, the Market has been ranging in a clear consolidation. Only a clearer Coronavirus pathway will push equity markets further.