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Will Fear affect the market?

July 17, 2020

July 17, 2020

Market wanders through the desertDmitri Demidenko

You gotta hustle if you want to survive. In 2018 analysts would regularly turn to Twitter while in 2020 they re-trained to be epidemiologists.  Trade wars and pandemics became the main drivers of exchange rate formation and nothing can be done about that. You can’t simply say that you don’t often understand what’s going on or else you will lose your job. Still, old school experts blame the market for being paradoxic. They continue to believe in the monetary policy’s divergence and wander through the desert like Moses once did: it’s hard to navigate in the desert without moss.

![LiteForex: Will Fear affect the market?][1]

The “market takes account of everything” concept is flourishing. Stock indexes collapsed in February on recession expectations although macro- statistics hadn’t given any bad signals. Then they have grown over 40% of the level of March’s trough even if the Covid situation has been getting worse and worse in the USA. Apparently, [S&P 500][2] has its reasons for growing.   If husband gives you flowers for no reason, there still must be a reason, right? Does the US stock market believe in vaccines?  Or do they really believe that the corrective potential is limited because of Fed’s big liquidity? Euphoria is still ruling over the market. It’s even more strange as economy is being ruled by Fear.

According to the University of Chicago’s research, the fear of disease plays a bigger role in the population’s economic behaviour than any other rules or governmental support measures. While other countries report that the epidemiological situation is under control, the US situation continues getting worse. As a consequence, the Americans will need more time to return to their normal lifestyles, which will affect the economy.

- The unemployment rate will be cut in a few years.

- Great! Will the economy grow then?

- No, it’s just because some working population will die out.

According to National Bureau of Economic Research, the employment rates in Covid-affected and Covid-unaffected states aren’t much different. People are governed by Fear. If the death toll starts growing together with the number of new coronavirus cases, the stock market’s euphoria will yield place to panics. What’s more, based on P/E, [S&P 500][2] is as oversold as it was during the dotcom crisis when the bubble burst out…

![LiteForex: Will Fear affect the market?][3]

But the pandemic isn’t the only thing that makes stock indexes collapse. Donald Trump continues tweeting and seems to forget that spoken words fly away. The US president continues criticizing China: “We made a great trade deal. But as soon as the deal was done, the ink wasn’t even dry, and they hit us with the plague”. However, the States holds off punishing Beijing with the same stick used in 2018-2019. Their dog isn’t mad, it’s just a dog of principle. ![LiteForex: Will Fear affect the market?][4]

Thus, we live in a world where the main question is whether the US stock market’s euphoria will yield place to Fear or calm the panicky economy. Every trader must want to have a look into the future, but if no one has ever visited us from there, the future might not exist at all.

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Price chart of SPX in real time mode

![Market wanders through the desert][7]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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