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Dow Stumbles as Wall Street Debates the Case for Negative Rates

Last Updated September 23, 2020 1:58 PM
Francois Aure
Last Updated September 23, 2020 1:58 PM
  • The Dow Jones stumbled on Thursday after another dire jobless claims report.
  • Speculative trading is dominating retail investment platforms, while seasoned stock market investors sit on the sidelines.
  • The Federal Reserve may discuss negative rates this month.

The Dow Jones went nowhere on Thursday after another miserable jobless claims report snapped the U.S. stock market’s weeklong rally.

As the employment crisis deepens in the United States, it seems more and more likely the Federal Reserve could turn to negative interest rates.

Dow Jones Backtracks After Lockdown Layoff Toll Ticks Past 42 Million

Dow Jones, Stock Market, Jobless Claims,
The Dow Jones traded slightly lower after another 1.8 million U.S. unemployment claims last week. | Source: Yahoo Finance 

All three of the major U.S. stock market indices trended lower on Thursday.

  • The Dow dipped 67.39 points or 0.26% to 26,202.50.
  • The S&P 500 dropped 0.59% to 3,104.50.
  • The Nasdaq fell 0.88% to 9,597.84.

Dow bulls have proven extremely reluctant to slow down their buying, even as economic fundamentals have collapsed.

Today’s initial jobless claims report  once again came in worse than forecast but was a narrower miss than has been seen in the last month. Another 1.8 million people out of work means at least 42 million Americans have been unemployed at some point during the last 11 weeks.

The losses should have peaked, but the stakes are high for investors all in on a V-shaped recovery, while a large portion of the cooler heads remain on the sidelines.

A significant byproduct of this is a stock market fueled by speculation rather than fundamental investing.

For this reason, there has been an extreme disconnect between the analysts and economists on Wall Street  and retail investor sentiment.

Another factor driving capital into the Dow is the continuation of goldilocks conditions for equities. Despite the trillions that have been printed by the Federal Reserve, deflation continues to plague CPI readings around the world.

This means most bulls have no fear of interest rates heading higher; in fact, many believe that negative interest rates are more likely than a hike. 

Economist Sebastian Galy at Nordea Asset Management believes that the FOMC may make the first step towards sub-zero rates by discussing them at their upcoming meeting this month.

Galy said in a statement shared with  CCN.com,

The Federal Reserve is likely to announce that it is considering negative interest rates at its next meeting on the 10th. The Mainstreet program will then be underway in all probability.

They will update the economic projections, giving a slow but rapidly accelerating recovery in 2021 and a more optimistic message.

It will be extremely interesting to see the reaction in the U.S. stock market if the Fed does make a U-turn on this issue. Powell and many on the FOMC have been explicit about avoiding the negative bound .

Dow 30 Stocks: Boeing Lifts Index as Apple & UnitedHealth Fall

The Dow 30  fell less than the S&P 500 and the Nasdaq thanks to a second straight buoyant session for Boeing (+6%).

Driving BA stock higher was news that American Airlines was adding flights, while there has been evidence around the country that air traffic is picking up.

It was a good thing for bulls that Boeing had such an excellent day, because two of the Dow Jones’ most heavily weighted stocks, UnitedHealth Group and Apple, were in the red.

While AAPL lost 1%, UNH was down 3.3% – likely because Joe Biden is currently dominating Donald Trump in both national polling  and the betting markets .