New Cold War: How the 2020 Stock Market Bull Run Can Be Spoiled in Q4

US stock market
U.S. stocks quickly rebounded from their March low, but the rally could prove difficult to sustain toward the end of 2020. | Image: Spencer Platt/Getty Images/AFP
  • Wall Street investors foresee U.S.-China relations worsening until the presidential election in November.
  • The stock market is cautiously rising due to the Federal Reserve’s optimistic initiatives.
  • Over-valued tech stocks, rising geopolitical risks, and lackluster stimulus could leave shares vulnerable to a correction.

Wall Street fears a new cold war is starting to take shape. Some strategists say U.S.-China relations can no longer recover back to “normal.” Consequently, the U.S. stock market could see a correction in autumn, several investors say.

Futures on the Dow Jones Industrial Average are trading cautiously higher following a 0.6% uptick on Wednesday. Pre-market data suggest the Dow is on track to open more than 100 points higher on Thursday.

stock market
The U.S. stock market set for a minor gain on Thursday. | Source: Yahoo Finance

Hopes for a bigger stimulus deal appears to be boosting investors’ appetite for risk.

Strategists Become Cautious About Q4

The stock market was initially set for a prolonged rally in the second half of 2020. Talks of another round of stimulus, coupled with aggressive Fed policy, were set to drive stocks even higher.

Strategists are now becoming cautious about the stock market’s trend in the fourth quarter.

RW Advisory strategist Ron William said the stock market could see a perfect storm of “asymmetric” issues in the final three months.

William noted there are risks on all “technical, seasonal, and political fronts.” A drop below 3,000 for the S&P 500 Index could signal a downtrend, he said.

Wall Street investors fear that geopolitical risks are intensifying, as the U.S.-China relations worsen.

Rockefeller Asset Management’s chief investment strategist Jimmy Chang warned U.S.-China relations might not return to normal:

Given the Covid-19 crisis, how China handled the early stages of it and now the imposition of the national security law on Hong Kong, it’s really difficult to see how the U.S. and the West and China can get back to normal.

Until the presidential election ends in November, anti-China rhetoric will continue to escalate, according to Chang.

The impact of geopolitical risk on near-term gains remains uncertain, however. Some investors are hopeful that the Federal Reserve’s optimistic policy could offset the risks that arise from worsening U.S.-China relations.

stock market vix
The VIX’s historical cycle suggests a stock market pullback could occur soon. | Source: SentimenTrader

Markets Only Care About the Fed

David Rosenberg, a long-time stock market bear, believes equity markets are disregarding the economy due to Fed intervention.

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Investors see a high level of liquidity across the market and relaxed financial conditions due to the Fed’s efforts. Some also believe that the central bank could start buying stocks soon–an unprecedented move to stimulate the market.

Those beliefs follow the Fed’s June announcement when it confirmed plans to purchase a diversified portfolio of corporate bonds.

The Fed said on June 15:

The Federal Reserve Board on Monday announced updates to the Secondary Market Corporate Credit Facility (SMCCF), which will begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers.

Investors remain mixed on the near-term performance of the stock market. Concerns of over-valued tech stocks, worsening U.S.-China relations, and lackluster stimulus could leave stocks vulnerable.

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