Sep 24, 2020 - Economy

The stock market's not-enough tantrum

an illustration of a wiggly line graph

Illustration: Eniola Odetunde/Axios

The market looks like it may be throwing another tantrum, investors say. But the cause is different this time around.

What's happening: This selloff is beginning to look like the 2013 taper tantrum, which roiled markets as U.S. government yields rose in response to an expected reduction of the Fed's quantitative easing (QE) program.

  • But this time it's the dollar rising in response to doubts about the Fed's ability to deliver on higher inflation and more market stimulus.

The big picture: Following the unexpected death of Supreme Court Justice Ruth Bader Ginsberg last week and the potential for an election meltdown, more investors are betting that additional fiscal stimulus from Congress is also not forthcoming.

  • It was a "kick in the head" for the market, says Richard Steinberg, chief market strategist at The Colony Group.
  • And it is now reversing this summer's gains in stocks and precious metals as traders unwind their bets for a reinflated economy and pile back into the dollar.

Why it matters: The selling across asset classes suggests the boost from the $2 trillion CARES Act and the Fed's $3 trillion QE infinity program have worn off, and without a new catalyst to reignite bullish momentum the overall trend will be for stocks to fall with very few assets moving in the opposite direction to provide safe havens.

By the numbers: The S&P 500 fell 2.4% and the Nasdaq dropped 3%; gold declined 2.6% with silver sliding 2.9% on Wednesday.

  • The dollar rose against all major currencies and gained more than 1% against most commodity-linked and emerging market currencies that tend to rise when markets favor risk-taking.
  • U.S. Treasury yields were little moved.
  • The S&P has fallen 9.6% from its Sept. 2 peak and the Nasdaq is down 11.8%.

Catch up quick: At its latest policy meeting last week the Fed said it would maintain its bond-buying at least at current levels, but did not promise further increases.

The bottom line: "By giving the market so much accommodation ... the Fed has essentially created a spoiled child where nothing’s enough and there always has to be more," Tom Essaye, founder and president of Sevens Research, tells Axios.

  • "We're in a mini feedback loop — the Fed is not going to do any more, the market has run a long way, tech is super overvalued, COVID seems to be coming back — and you get some momentum behind that and all of a sudden the S&P is down 10%."
  • "Where does it stop? From a fundamental standpoint, you could still see another 5% before you get to a level of valuation that makes sense."

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