The Dow Jones rallied on Monday as the Fed extended its repo market intervention and stock market bulls ignored "FOMO bubble" warnings.
The Dow Jones reversed early losses on Monday, grinding a step closer to 30,000 despite a spate of alarming coronavirus headlines.
But as the overall U.S. stock market ignores the epidemic, which has now killed 910 people, investor nerves may be showing. Haven assets are rallying, and talk of a “FOMO bubble” continues to gather pace.
Among the major U.S. stock market indices, the Nasdaq was the top-performing index. Tesla surged again, helping launch the entire tech-heavy index 0.94% higher to 9,610.21.
The Dow Jones Industrial Average climbed 131.46 points or 0.45% to 29,233.97.
The S&P 500 split the difference, jumping 0.57% to 3,346.60.
The risk-on environment took its cue from the Federal Reserve, which initiated $38 billion in repo actions to add liquidity to financial markets.
The commodity sector saw the price of oil crushed again. WTI crude slid 1.5% and dipped back below $50 per barrel level. Brent crude plunged more than 2.2%.
Despite the move higher in stocks, the price of gold pivoted 0.25% higher, alongside the safe-haven Japanese yen.
Dow bulls’ optimism may be centered around the fact that the spread of the coronavirus may be starting to slow.
Official Chinese numbers are under intense scrutiny, as Wall Street attempts to figure out how long it will take the world’s second-largest economy to get back on its feet.
With speculation rampant about the true extent of the impact, the Dow Jones is taking a glass-half-full approach.
Time will tell if this is the correct approach, but if the latest development in Hong Kong regarding possible environmental transmission is anything to go by, China may not be out of the woods yet.
The World Health Organization recently claimed that current statistics could only represent the “tip of the iceberg.”
The external shock to global supply chains will become a bigger problem the longer it persists.
U.S. stock market valuations were already elevated before the outbreak, so it’s not surprising that bubble talk has gathered pace on Wall Street.
We’ve also argued earlier that central banks (& the Davoisie) may be creating a new bubble. The Fed’s 1998 easing helped boost the dot-com bubble, and the easing of 2019/20 may be contributing to a new bubble, perhaps this time a green one (you know – to save the climate). One might, perhaps, see the recent price-action of the Tesla stock as supportive of this idea.
The disconnect between equities and bonds is equally striking. Speaking to Fox Business, Allianz Chief Economic Advisor Mohamed El-Erian warned that investors have been conditioned to “trust central banks” and buy every dip. He chalked this up to a “FOMO” (fear of missing out) mentality.
Listen to his full comments below:
As El-Erian explains, artificial liquidity injections may be to blame for the strange occurrence where fear and stocks can rise together.
This may explain why the Dow Jones has not responded meaningfully to the coronavirus.
On a quiet day for the Dow 30, there was not a great deal of movement among the index’s key stocks.
Bucking this trend, Boeing (NYSE: BA) was able to post a 2.2% gain after it finally got an upgrade to a buy rating by one Wall Street analyst.
Apple (NASDAQ: AAPL) ticked 0.35% higher, and Microsoft (NASDAQ: MSFT) recorded a healthy 2.2% rally.
Once again, Exxon Mobil was the big loser in the Dow Jones. The energy giant dropped more than 1% as crude oil struggled. Fellow big oil stock Chevron was more resilient, rising 0.5%.
This article was edited by Josiah Wilmoth.