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Why did the US stock market suddenly panic?

2020-11-03 09:14:27

VNSMART- The Dow Jones index plummeted more than 900 points overnight, closing down for the fourth consecutive trading day, the largest drop since June 11; The S&P 500 index also hit its worst performance since June 11, falling 3.5%, which was the third consecutive day of decline.


This sell-off was affected by the European market. The increasing number of new crown cases prompted the leaders of Germany and France to announce new lockdown measures, that triggering people's worries that economic activities deviated from the recovery track and fell into a slowdown again.


However, the problem is that the epidemic in Europe and the United States has never been completely contained. In view of the gradual cooling of the weather, the threat of a rebound of the fall epidemic has long been considered a potential risk. So why were investors completely caught off guard yesterday?


Why did the US stock sell-off accelerate?


FNH Financial analysts said that investors were mainly surprised by the rapid deterioration of the epidemic in Europe. The original market assumption was that the infection rate in this area was low enough to withstand a severe outbreak like the spring. But the fact is just the opposite.


In fact, the resumption of travel and people's behavior patterns in Europe have not changed much from those in summer (the risk of infection is relatively low), which has already laid hidden dangers for a comprehensive counterattack against the epidemic. Investors in the US market are worried because the US is likely to follow the pace of Europe.


Former US Food and Drug Administration (FDA) Commissioner Scott Gottlieb said that the United States and Europe are on the same path, only three to four weeks later than Europe.


Last week, the United States has set a record high of 80,000 new cases in a single day; On Tuesday, the number of new cases exceeded 70,000 again. Foreign media showed that the 7-day average of new cases reached the peak of the entire pandemic on Monday based on analysis of data from Johns Hopkins University,indicating that the spread of the virus is accelerating.

But here comes the problem again: Although the economy has to pay a high and painful price for the blockade, facts have proven that this is not an insolvable economic loss. Why is the market turbulent like Wednesday?

According to FNH Financier speculation, one is because investors seem to be unable to conduct “efficient” transactions in the context of the pandemic. At first, they acted too indifferently, and then too confident about the central bank and vaccines. Now they start to panic when the prediction that "this winter will be very difficult" seems to be fulfilled.


Another possible reason is that the market has overpriced the US election in the near future, but in fact the impact of the election may not be apparent until the next 12 to 18 months.The market’s optimism may have gone too far.

Sell out and leave or buy on dips?


So, does this mean that investors need to sell out?


Some analysts believe that the slump of U.S. stocks may just be an overreaction and a necessary correction before the general election.Commonwealth Financial Network Chief Investment Officer Brad McMillan pointed out that this decline is both necessary and healthy because of the recent optimism surrounding the epidemic and the economy may have been overdone.


Leuthold Group's Jim Paulsen said that the market may believe that the latest rebound in the epidemic will have a greater impact on the economy, but in fact the mortality rate remains between 1-2%; And the economic growth rate in the fourth quarter and beyond may be stronger than many people think now if the fatality rate remains low.


Other indicators also provide similar evidence. The inflation priced in US Treasury inflation protection securities is lower than at this time, but it is still not enough to explain the decline in the stock market. The gap between the 30-year and the 5-year US Treasury bonds narrowed by only about 4 basis points during the US stock sell-off.

Therefore, these analysts believe that it may be a buying opportunity for the decline in recent days.


But this may only apply to long-term investors. Don't forget that the US election is approaching, and polls show that Biden's advantage in key battlefield states is shrinking. According to RealClearPolitics' moving average survey Trump is ahead of Biden in the polls in the battlefield state of Florida before only six days from Election Day.The situation that investors worry most is the dispute over the outcome of the US election may still happen.

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