What sparked the recent market selloff?
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Julie Zhang, director, North America sales enablement, discussed the U.S. Federal Reserve (the Fed)’s latest economic outlook as well as likely catalysts behind the recent stock-market plunge.
No rate increases for a long time, Fed Chair Powell says
Following the Fed’s two-day policy meeting, Chair Jerome Powell affirmed on June 10 what markets had been anticipating: the central bank has no plans to increase U.S. interest rates for a long time, possibly through the end of 2022. “As Powell put it, the Fed is not even thinking about thinking of raising rates—and that’s a very strong signal that the central bank understands now is not the time to take away any part of the punch bowl,” Ristuben remarked.
Despite this dovish statement, U.S. equity markets still dropped in the wake of Powell’s comments. Why? The reason likely centers around the Fed’s newly released economic outlook, which forecasts high unemployment and a significant drop in U.S. GDP (gross domestic product) through the remainder of the year, Ristuben said.
“The Fed predicts that the unemployment rate, which is currently around 14%, will fall to only a little less than 10% by the end of December. While that’s not enormously shocking, it’s quite sobering for markets to hear this straight from the Fed’s mouth,” he explained. The central bank’s projection of a 6.5% decline in GDP this year likely had the same effect on markets, Ristuben added. “The Fed essentially confirmed that the current U.S. recession will be really bad—and while that in and of itself isn’t a big surprise, hearing it directly from the leaders of the nation’s central banking system really underscores how bleak the economic picture is.”
Markets plunge as coronavirus cases rise in parts of U.S.
After the modest drop in U.S. equities following Powell’s comments—the S&P 500® Index dipped 0.5% on June 10—markets plunged dramatically the next day. The S&P 500 sank by 5.9% on June 11, while the Dow Jones Industrial Average tumbled nearly 7%. What sparked the steep selloff?
“It’s important to understand that markets had run very far, very fast, since bottoming out in late March,” Ristuben said. “The incredible rally in stocks since then was one of the steepest upward climbs ever recorded in a 50-day period,” he noted, “and this finally led to markets being a little overbought.” From late March until early June, Ristuben said, Russell Investments’ sentiment indicator had continuously flashed an oversold signal.
The main catalyst for the June 11 rout was likely the news of an increasing number of coronavirus cases in some U.S. states, he said—particularly Texas, Florida and Arizona. While Ristuben believes this is cause for potential concern, the overall picture of the outbreak on a national level is far from clear, he added.
“On a rolling one-week average, new cases nationwide rose less than 1%, which is the slowest increase, percentage-wise, that the U.S. has seen in coronavirus infections since March,” Ristuben explained. He added that in other parts of the world that have reopened their economies, such as Europe, an increase in cases has largely not been observed.
“Ultimately, there’s still plenty of uncertainty regarding the spread of the virus and the potential for a second wave of infections—and this means additional market volatility is likely in the weeks ahead,” Ristuben concluded.