When major events happen around the world, and seemingly wherever they happen, the question quickly arises: How will this affect the markets?
When two seminal events occur at once …. well, when does that ever happen? How much anxiety and uncertainty are we supposed to take over the financial effects of unforgettable U.S. history markers?
And it is not just a pair of tipping-point societal moments – the coronavirus and the coast-to-coast protests and rioting over the killing of an unarmed black man, George Floyd, by a policeman – that have owned investors’ attention. There is China’s new national security law affecting Hong Kong’s autonomy; the increase in U.S.-China tensions due to the coronavirus, trade and now Hong Kong; and the European Union relief package coming on the heels of the huge U.S. stimulus programs.
It’s been a dizzying few weeks. Yet amidst all the whirlwinds, U.S. stocks have been fairly steady recently. Some analysts think the main explanation for Wall Street’s resiliency, despite mass turmoil from the two tipping points, is the economic rescue marshalled by the federal government. The Fed slashed interest rates to zero and unleashed emergency aid programs. Meantime, there are hints of a recovery – mortgage applications are rising, more people are flying again, and unemployment claims are flattening.
So what’s in store for the next few months?
- The protests and riots will have little to no effect on markets. America’s worst race crisis in 50 years comes as we experience depressionary levels of unemployment and are in the midst of the greatest economic crisis in our history. Yet, U.S. markets are at record levels and all-time high valuations.
Due to unprecedented Federal Reserve and U.S. government intervention, markets have essentially become liquidity gauges. As bizarre as it seems, I don’t expect the unrest to have any impact on equity prices. If anything, it could possibly serve to increase federal spending and government intervention.
- The Hong Kong situation bears watching by all markets. The developments in Hong Kong are far more serious than markets are pricing in. A takeover of Hong Kong will be the equivalent of China thumbing its nose at the entire developed world. It will most assuredly heighten trade tensions and dampen global economic growth even further than it already is.
Additionally, it could imply that China is under significantly more economic/fiscal pressure than is currently believed. There is no question that a takeover of Hong Kong will be, at the very least, a significant development and disruption to the global economy, which is already in a precarious place. The real question is: Just how big of a disruption would it create and, more importantly, what does that imply for U.S. and China relations going forward? Without question, relations between China and the U.S. have become more tense, and they could become a headwind for the stock market.
- A stimulus won’t save the EU. While the EU relief package will certainly help things in Europe, it appears to be more of a stopgap measure and pales in comparison to actions taken by the U.S. government. Although it’s important to keep a watchful eye on all EU relief measures, be far more focused on recent comments by Macron and Merkel that point to a willingness, or at least an openness, to a tighter fiscal union.
The EU, as it is currently structured, cannot survive. Germany will have to relent on European Central Bank guidelines – which restrict the central bank from applying unilateral quantitative easing and other forms of monetary stimulus (currently the ECB can only apply monetary stimulus evenly across all member countries). Or, more countries, specifically Italy and Spain, will be forced to leave. This issue is far more critical to the economic prospects of the EU as a whole.
At some point in the not-too-distant future, America’s real consumer confidence, or lack thereof, matters. For investors, a big question now is whether improvement in business activity and some consumer behavior seen in May’s earnings reports will keep building.
Zach Abraham is principal/chief investment officer of Bulwark Capital Management
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine, Markets Media Group or its staff. Traders Magazine welcomes reader feedback on this column and on all issues relevant to the institutional trading community.