President Trump's confrontaiton with China, and not COVID-19, is the biggest risk to the stock market, analyst claims.
Wall Street’s weird attitude toward coronavirus has been confirmed in recent days, as the stock market has looked more vulnerable to rising U.S.-China tensions than it has to surging unemployment and dire PMI readings.
In a classic case of just how out of touch asset prices have become with the real economy, the Dow Jones, S&P 500, and Nasdaq have all soared off their lows. Their recovery comes even as economic fundamentals collapse.
In the United States, the coronavirus lockdown has triggered a steep rise in unemployment, with initial jobless claims eclipsing 30 million over the last six weeks.
Throw into the mix a wobbling energy industry and the possibility of financial ruin for domestic service and oil and gas companies, and we have a dire situation before we even get to Trump’s tariffs.
So, why did the stock market in April enjoy one of its best months ever?
According to Zhiwei Zhang, president and chief economist of Pinpoint Asset Management, the move in equities is linked to the belief that the coronavirus pandemic has peaked:
The virus situation (has) already peaked. On the margin, it’s gradually improving. There are always concerns about a second wave (but) as long as the general public, as well as the governments, are aware of that risk, the risk is contained to some extent.
Zhang went on to describe how a return to the “Trade War” conditions is what worries strategists who make their money off the bulls:
U.S.-China trade tensions look like something that will pick up. That’s probably the number one concern in the market when we talk to investors and sell-side analysts.
It seems unlikely, however, that the calm on Wall Street was broken by Donald Trump’s sharp increase in anti-China rhetoric alone. While Zhang believes the coronavirus is no longer the main headwind for stocks, don’t forget that the pandemic is the main source of tension.
The relative stability of the U.S. economy before the pandemic would have made the Dow much more resilient to fresh tariffs–if there weren’t 30 million Americans in need of a job.
What the economist has explained well is how the stock market’s marketing machine has managed to spin a bullish storyline out of the lockdown.
Spinning a “trade war progress” dialogue as we saw at the end of 2019 is not going to be possible given all that has occurred, and this is really what has the sell-side worried.
With the Dow Jones more overvalued than it was in January (according to the Buffet indicator), how do you get already cautious clients buying if you have a pandemic and a trade war?
The challenge could be even greater if we continue to see signs that the coronavirus is far from peaking in the United States.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: September 23, 2020 1:54 PM