7 reasons the stock market may face severe turbulence next week and beyond: only one is the increase in coronavirus cases

The journey from here could get much more bumpy after the Dow recorded its worst one-day loss since June 11 on Friday, lowering the blue chip index to its lowest point since May 26 and at least momentarily leaving I encourage equity investors. who may be gradually losing their bullish thesis as COVID-19 infection rates in the US rise further.

Over the past week, the acceleration in the daily rate of new coronavirus cases in several U.S. states has prompted investors to rethink the uptrend that the Dow Jones Industrial Average DJIA has taken,
and S&P 500 index SPX,
more than 30% more than its lows at the end of March and the technology-laden Nasdaq Composite COMP,
over 40% of its recent 2020 nadir.

Read:Here is a hedge fund strategy that might work for you

The United States recorded more than 45,000 cases on Friday, according to data compiled by Johns Hopkins University, far exceeding the record 39,972 cases reported on Thursday and injecting doubts into optimistic projections for a rapid economic recovery from the pandemic that paralyzed business activity during almost four months.

The surge in new coronavirus cases on Friday prompted the governors of Texas and Florida to reverse some business reopening measures, after those states were among the first to try to restart economies that had been facing severe distancing restrictions. social to reduce the spread of contagion. Texas reported 6,426 new cases of coronavirus on Thursday and Florida reported more than 8,900.

Check out:Here’s why stock market angst over the rise in coronavirus cases is escalating on Wall Street.

The resurgence of the pathogen seemed to be sufficient cause for the White House Coronavirus Task Force, comprised of Vice President Mike Pence and top U.S. public health experts, who had been silent since the April 27, it will hold its first briefing since then on Friday.

For many investors MarketWatch spoke to, the outlook for the market begins and ends with the decline of the epidemic or at least the discovery of credible vaccines and treatments.

However, there are a number of factors that also have the potential to exacerbate volatility in the financial markets next week and through July.

Of course, those factors include the lingering effects of the pandemic, but also a number of issues that could create additional distress for equity investors:

  1. Increase of infections and hospitalizations of COVID-19 cases
  2. Economic surprises from the US Department of Labor monthly jobs report due Thursday
  3. Quarterly and monthly rebalancing of portfolios for pensions and mutual funds
  4. Stagnant plans for further economic stimulus from Congress
  5. Joe Biden’s leadership in the presidential polls
  6. Market techniques used by some investors as tools for decision making.
  7. Low stock market volumes in a week shortened by holidays before July 4 will be seen on Friday

When asked how he would rate the numerous problems, Jamie Cox, managing partner of Harris Financial Group, told MarketWatch that the epidemic is first and foremost.

He said “it all starts and stops with the virus. All other effects are based on the result of the first one.”

Increasing infections

Indeed, hopes for a sustained economic recovery rest on the ability of the US to effectively beat the coronavirus epidemic, although the lack of a uniform national strategy makes public health outcomes uncertain, experts say.

MarketWatch’s Jaimy Lee reports that a COVID-19 vaccine would change the trajectory of the pandemic, which has killed nearly 500,000 worldwide, allowing economies to completely reopen and people to return to work and school. However, a vaccine may not immediately be a panacea, according to Bernstein analysts in a June 5 report: “While we are optimistic about the eventual development of SARS-CoV-2 vaccines, we would not expect the initial harvest of vaccines. be silver bullets that solve the pandemic. ”

Economic reports

Investors await the Labor Department’s monthly jobs report, to be released on Thursday, due to the July 4 holiday to be held this year on Friday. The May report showed the surprising addition of 2.5 million jobs, confounding expectations for another big decline and, perhaps, raising expectations for a big rebound next week. The average estimate by economists surveyed by MarketWatch is that 3 million jobs will be added in June and the unemployment rate will drop back to 12% from 13.3%. A disappointment on Thursday could shock investors and flatten the market to the same degree that May’s report helped spark a powerful bullish trend.

In addition, many have warned that a full recovery in jobs, which now has some 30 million Americans receiving unemployment benefits, could take years to return to pre-coronavirus levels.

“As good as recent economic data has been, we want to make it clear that it could still take years for the economy to fully return,” wrote Ryan Detrick, senior market strategist at LPL Financial, in a research note on Friday.

He notes that during the 10 recessions since 1950, it took an average of 30 months for lost jobs to recover, and none of those recessions saw losses in the labor market of the magnitude and speed of this recession (see attached chart):

Quarterly rebalancing

Market participants predict that billions of dollars in stocks and bonds could be traded in investment portfolios, as investors aim to maintain specific allocations of stocks and fixed-income investments at the end of the quarter or month. Those allocations are traditionally around 60% stocks and 40% bonds, but the massive increase in stocks during the quarter may force a considerable rebalancing.

“Given the significant rebound in global equities we have seen in the second quarter, it is natural to believe that there will be a rebalancing of stocks and bonds in the quarter,” said Brian Price, chief investment officer at the Commonwealth Financial Network. , he told MarketWatch.

He said he has seen estimates for pension funds that move more than $ 75 billion from stocks in the coming week. CNBC reported that the rebalancing could range from $ 35 billion to $ 76 billion.

“The volatility that we are seeing in the market today could absolutely persist as we get closer to the end of the quarter next week,” Price said. However, he cautioned against investors timing the market in anticipation of pension fund movements.

Stagnant stimulus

Additional government stimulus spending to help small businesses and individuals has been discussed in Congress and analysts have predicted that another bipartisan aid measure is likely to arrive in late July. Treasury Secretary Steven Mnuchin earlier this month noted that the Trump administration was open to providing another round of aid, but there is concern that there is not enough consensus to move forward with additional assistance.

The Democratic House passed a $ 3 trillion coronavirus relief bill last month, and the move represents an opening offer in talks with the Republican-controlled Senate and the Trump administration.

Some experts say that without additional help soon, the economy and the market could also stagnate.

The Biden Advantage

A Siena College / New York Times poll released Wednesday found presumed Democratic presidential candidate Joe Biden overtaking Trump 50% to 36%. This occurs a week after a Fox News poll that made Biden lead from 50% to 38%.

Biden has said it would raise the corporate tax rate to 28%, rolling back Trump’s corporate tax reforms in 2017. A Goldman Sachs report estimates that such a result would change 2021 earnings per share for the S&P 500 to $ 150 from a current estimate of $ 170.

Earlier this week, CNBC personality Jim Cramer attributed a massive sale on Wednesday to Biden. “This for me is a movement by Biden,” adding that “it seems that he is another president who is not favorable to capital.” If that’s the case, I want to have some cash. “

Market techniques

MarketWatch’s Tomi Kilgore notes that a break in a trend line for the 10-year Treasury note could also bode poorly for the stock market’s uptrend.

Points out that the 10-year benchmark yield on the TMUBMUSD10Y,
broke below an ascending trend line, catching a flight offer to safety, to push it 3.8 basis points (0.038) percentage points lower to a 0.636% yield, marking its lowest performance close since May 14 , according to Dow Jones Market Data based on a 3 pm Eastern time close.

That move to Dan Wantrobski, technical analyst at Janney Montgomery Scott, suggests that the uptrend of the COVID-19 low in early March has ended.

“The break here suggests that the highest lows pattern since April has been blocked, and we can see lower returns in the coming sessions combined with a further pullback in equities that they experienced since the March collapse,” the analyst wrote.

Low volumes

A week of trading shortened on holidays, with the market closed in the US in observance of the July 4 holiday on Friday, could exacerbate price changes as traders tend to leave early on holidays.