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The Dow Jones Just Got One Hell of a Wake Up Call

Last Updated September 23, 2020 1:55 PM
Ben Brown
Last Updated September 23, 2020 1:55 PM
  • After a monster selloff yesterday, Dow Jones Industrial Average (DJIA) futures point to a nervous open this morning.
  • It was a hell of a wake up call for investors and shows how much volatility is still lying underneath the stock market.
  • Wall Street analysts are cautious ahead of Fed chairman Powell’s statement this morning.

After weeks of trading with relative calm, the Dow Jones Industrial Average (DJIA) got a nasty shock yesterday. The stock market plunged almost 2% in the last hour of trading as volatility roared back to the market. Traders remain nervous this morning, with futures pointing to a flat open.

It was a wake-up call for investors, many of whom were beginning to get complacent about a quick recovery. Black Rock’s Neeraj Seth said the short-term picture now looks uncertain .

In the medium horizon, I would still be positive on equities, but in the near-term we are somewhat cautious.

Investing legend Stan Druckenmiller also urged caution as the market plummeted. He said the outlook is the bleakest he’s ever seen with stocks at these levels .

The risk-reward for equity is maybe as bad as I’ve seen it in my career.

Dow futures set for a nervous open

Yesterday’s reality check has made investors nervous and the stock market looks set to open almost flat this morning. Dow futures  were a tentative 31 points higher after a lifeless overnight session.

Dow Jones DJIA stock market futures chart
Dow Jones Industrial Average (DJIA) futures were lifeless overnight and look to a cautious open. Source: Yahoo Finance

S&P 500 futures  were also flat, while Nasdaq Composite futures  carved out a small 0.3% gain.

Volatility roars back to the stock market

Investors have been lulled back into a false sense of security in recent weeks. Stocks made a gravity-defying recovery from the March lows with the Nasdaq even turning positive for the year.

A sense of calm returned to the markets with the Dow trading in a narrower range. Volatility eased off. But it came back with a vengeance in yesterday’s session. Just look at the CBOE Volatility Index (VIX) spike in the last two hours of trading.

The CBOE Volatility Index soared to its biggest one-day gain in weeks during yesterday’s session. Source: TradingView

It was the biggest one-day points rise for the so-called ‘Fear Index’ in three weeks.

A one-two punch for the Dow

The selloff was triggered by a one-two punch. First, a dose of reality from Dr. Anthony Fauci. And second, an extension of LA County’s stay-at-home order.

Fauci delivered a somber testimony to Congress yesterday warning that America has not got control of the coronavirus . He said easing lockdowns won’t just exacerbate the health problem, but may trigger a fresh economic crisis.

[It] could even set you back on the road to trying to get economic recovery.

He also squashed the optimism for a Covid-19 vaccine, saying there’s no guarantee it will be effective .

The sell-off accelerated as LA County added three months to its stay-at-home order. A move that crushed any hopes of swift economic activity in America’s second-largest city.

Black Rock cautious about stock market upside

Speaking to CNBC, Black Rock’s Neeraj Seth said that uncertainty around America’s re-opening is likely to cap any upside in the short-term. After rallying hard on the declining Covid-19 hospitalizations in New York, the market is now shifting its focus to re-opening.

Equities are going to look for the cues from fundamentals, which is more driven by how the economies open up, what’s the risk of the spread or the second wave of Covid-19 and to some extent get guidance from there in terms of how that impacts the earnings treasure tree.

It suggests that U.S. stocks have sucked up all the optimism they can. And the long road to recovery may now dampen the relief rally.

All eyes on the Federal Reserve

Today’s session will be fixated on Federal Reserve chairman Jerome Powell. Powell will speak virtually to the Peterson Institute for International Economics at 9am ET. He’s expected to reiterate the central bank’s unprecedented support for the economy through the crisis.Trump tweet negative rates 

But most importantly, he’s like to address the issue of negative interest rates. A once-unthinkable phenomenon in the United States is now firmly on the table. President Trump has urged Powell to go negative, calling it a “gift.”  The Federal Reserve is expected to push back against the idea.

But the market isn’t convinced. The Fed funds futures market is currently pricing in negative U.S. interest rates as early as April next year . If it happens, banks will pay the Federal Reserve to park their money overnight.