The global pandemic was directly responsible for the epic market collapse in March – the fastest in history – and it could be about to hit the markets again.
After a brief rebound in optimism that we had brought the pandemic under control, fear and volatility returned to the stock markets with a vengeance thanks to the so-called second wave of Covid-19.
A commonly used volatility gauge, VIX, has jumped 53% in the past 30 days, while the market’s benchmark S&P 500 recorded its biggest drop in a month on Monday. The S&P 500 has effectively given up on three months of gains as the Dow continues to sink deeper into negative territory in what is starting to look like the creation of another stock market crash.
CBOE Volatility Index (VIX)
Source: Business Insider
Source: CNN Money
Recovery hopes dashed
The latest market downturn was partly fueled by France and Germany take into account new lock restrictions, a trend that could quickly spread to other countries.
A second wave of coronavirus infections overwhelmed many European countries before winter at a rate that exceeded even the most pessimistic projections. The new lockdown measures in France are reminiscent of the previous lockdown, forcing people to stay at home except when they need to buy essentials, exercise for up to an hour a day or see a doctor. doctor. Meanwhile, Germany will close restaurants, bars and theaters from November 2 until the end of the month. Schools in both countries will however remain open.
The timing of the second wave of coronavirus infections could not have been worse, with the hope of a failed quick government stimulus deal while the US election is expected to inject another heavy dose of volatility.
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Hopes of an imminent deal for the US economy were dashed after the Senate was suspended until next week’s election, with little clarity on whether a deal can be sealed during the so-called “period of” lame duck ”, that is, the period after the January pending vote. inauguration.
New York Times bestselling author and founder of ‘The Bear Traps Report’ Lawrence ‘Larry’ McDonald warned against the ‘cobra effect’ where stimuli designed to save the economy will be instead ”…cause a hyperinflationary economic collapse. Larry sounded a strange warning for signs of aLehman print ‘‘developing in the markets and that “…we are at the very beginning of the biggest cobra effect in the history of the economy. »
the cobra effect Larry is referring to is the school of thought that says that every human decision has unintended consequences.
Markets have become too dependent on government largesse, but there is little that governments can do.
However, some analysts say Trump may actually be a better deal for the markets.
JPMorgan said that “An ‘orderly’ victory for Trump as the most favorable outcome for stocksPredicting that the S&P 500 could jump nearly 20% to 3,900 points if it manages to be re-elected.
On the other hand, JPM sees a sweep of Democrats as being ” mainly neutral ” for markets.
The healthcare, energy and financial sectors are likely to see the most outsized moves in either direction, depending on which candidate leads the day.
By Alex Kimani For Safehaven.com
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