The beauty of this market and looming risks
From the ashes of the disastrous 2008 Financial Crisis derived the most predictable and technically glorious market success stories in history. Perfect in design when charted, the S&P 500 appreciated 405% from the 2009 low without notable volatility, other than the market correction in March of this year, which has since fully recovered. The S&P 500 returned so much largely due to its exposure to Apple, which accounts for 30% of its total return; the story is not over as its trendlines still support a bull market for the foreseeable future. However, with the rising risks of depression level effects from the coronavirus and the unfolding misinformation from the White House about Trump's health raises potential new risks for this market. Can this be charted and can the risks be anticipated?
A channel in technical analysis, as defined by Investopedia, “is the price action contained between upward sloping parallel lines” and is the technical basis for the stock market's predictability. The two times it was breached was in December 2018 and again in March of this year, both of which reverted to its normal price action within its defined channel. Market behavioral scientists might analyze this phenomenon as human nature in action; and with the excess liquidity in the market created by low interest rates this may drive investors to further participate at a predictable pace.
The effects of quantitative easing which started in 2008, pushed interest rates to new lows further driving demand for equities boosting the stock market. Should interest rates rise in the future, this might be the end to the market’s bull run, finally. Additionally, it could have complications from an election fallout or the demise of President Trump himself, both of which might have serious, unpredictable consequences on the market. Nevertheless, the sudden change in interest rates, possibly as a result of political affects, may be the catalyst for a new correction.
The market corrected 36% already this year and reversed in predictable fashion, establishing a notable Broadening Formation^2, defined in technical analysis as a continuation in the major bull-market trend. The correction was a result of the massive risks around the coronavirus and its unknown implications. Due to the major stimulus and lower interest rates by Central Banks, the market has since fully recovered, rejecting any future instability of the effects from the coronavirus. In other words, the market tested the pandemic and decided that it’s not worrisome. Newly coming to fruition is the implications of a suddenly changing government, which is unknown; the market hasn’t tested this yet.
We'll have to wait and see how the market reacts to the news that comes out of the White House. It's obviously critical that lines of succession are clearly defined, however it’s highly doubtful that Trump would ever relinquish his Presidency in his own capacity.
At Eureka wealth management I keep my clients informed of looming market risks while keeping our eye on long-term goals. I also do financial planning, insurance, tax and estate planning. Call for a free initial consultation or book online at eurekawealthmanagement.com.
FT 9/30/20: “‘Surreal’ turn in US politics fuels bets on turbulence”