Investors are in a state of total confusion and don’t seem to know which way to turn. One day they’re riding high on expectations for a V-shaped recovery, or a favourable report on a vaccine test, or maybe just because the sun is shining. The next, they are dumping stocks and searching for risk-off alternatives.
Just look at what happened last week. The Dow Jones Industrial Average posted modest gains on Monday and Tuesday. On Wednesday, investors suddenly became nervous and the index plunged more than 700 points. On Thursday, the optimism was back, and the Dow regained 300 points. On Friday, the bears returned and we saw another retreat of 730 points. By the time it was all over, the Dow had lost 1,140 points between Tuesday and Friday. The other major North American indexes showed a similar pattern.
This could be the start of the pullback I’ve been expecting for some time, or maybe not. Monday’s rally again showed the remarkable resiliency of investors in the face of the coronavirus and the devastating impact it has had on the global economy. Last week’s barrage of bad news may dampen some enthusiasm but there are still a lot of optimists around. They have a lot to contend with, including:
COVID cases spike in the U.S.
The situation south of the border is truly alarming. States such as Texas, Florida, Arizona and California are among the many reporting dramatic increases in COVID-19 infections at a time when the contagion was expected to be in decline. The negative implications for the U.S. economic recovery are obvious.
Equally concerning is the fact that no one seems to be co-ordinating a national effort to slow the spread of the disease. The coronavirus task force, led by Vice-President Mike Pence, apparently still exists but it’s invisible to the U.S. public. This leaves it up to individual governors, mayors and local public-health officials to formulate what has become a patchwork quilt of policies which, in many cases, clearly aren’t working. None of this is conducive to a speedy economic recovery.
The Fed imposes restraints on banks
U.S. banks are in better shape than at the time of the financial crisis of 2007-09, says the Federal Reserve Board. That’s good to know. But the Fed is still nervous and has directed the banks to stop share buybacks and not to increase dividend payments in the third quarter.
The ostensible objective is to ensure the banks have adequate capital to continue lending activities for as long as the crisis continues. But by usurping the responsibility of bank managers and directors, the Fed seems to be signalling that problems may be building behind the scenes.
The Bank of Canada has not taken any similar action yet. But the move by the Fed, and the weakness of the economy, makes it highly unlikely we’ll see any dividend increases from our banks this year.
Trade wars (again)
You’d think that with the global economy in tatters, the United States would put aside its trade disputes for a while and focus on getting the engines of the economy back up and running. Instead, we’re hearing more talk from Washington about new retaliatory measures against China. There’s also a renewed threat of tariffs against the European Union, and a move to reimpose duties on Canadian aluminum. Enough, already!
Bumpy road ahead
Putting all this together, the new Governor of the Bank of Canada, Tiff Macklem, said in a speech last week that, while he expects to see some growth in the third quarter, it’s going to be a bumpy road back to pre-2020 levels. The pandemic has “created an economic shock unlike anything seen in our lifetimes,” he said in his first public speech since taking office.
“The course of the coronavirus is the biggest source of uncertainty,” he said. “Beyond that, we don’t know how global trade and supply chains will evolve, or what will happen with domestic supply and demand.”
Federal Reserve chair Jerome Powell has voiced similar comments.
In short, our central banks have no clue about what the future holds. No wonder the stock markets are in turmoil.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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