Are you confused about what is going on in the markets? Traders sure are.
“We all got comfortable thinking Covid was done or manageable, and it may turn out to still be a wild card,” said Peter Tchir of Academy Securities. “Nobody wants another year of lockdowns.”
This week, it looked like inflation/yield worries were going to replace Covid as the primary market risk, and as a result there has been head-spinning moves in stocks as investors have tried try to assess the impact of higher rates.
Figuring out that is hard enough, but now we are reminded of an unpleasant truth: Covid has not gone away.
“The Paris story was not what the market wanted to hear,” said Steve Sosnick of Interactive Brokers, referring to the French capital locking down again amid worries about new strains of the virus.
“The market was not in a mood to receive more bad news,” he told me. “The bond market was not particularly happy with [Fed Chair Jerome] Powell’s comments, and it didn’t help you have a [quadruple witching] expiration [Friday], which likely caused more volatility.”
That unpleasant truth — that Covid has not gone away — is a threat to one pillar of the market’s rally to new highs: The so-called reflation trade, where companies associated with the reopening of the U.S. economy — transportation, travel/leisure, industrials — have all led the market rally.
Paulsen also noted that the Covid crisis has also changed the way people look at the world.
“If you look back at what happened in the pandemic, we had the biggest drop in GDP, biggest loss in jobs, in history. And the Fed and Congress reacted with ferocity, almost immediately. If the Fed and Congress suddenly sped up their reaction time, why wouldn’t traders?”
Reference: CNBC
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