Things were looking peachy going into the final hour of trading on Monday, but investor sentiment soured and sent the stock market plummeting.
We’re now two weeks into the third quarter of 2020 and the world is showing no signs of going back to normal just yet. Evenings in with Netflix (NASDAQ: NFLX), shopping on Amazon (NASDAQ: AMZN), and avoiding Planet Fitness (NYSE: PLNT) in favor of Peloton (NASDAQ: PTON) remain the order of the day.
Stock market volatility and swings are no anomaly these days, but Monday’s market movement was certainly one to remember — or rather, forget! Having rallied strongly all day — the S&P 500 (NYSEARCA: VOO) briefly reached positive territory for the year — the market plummeted in the 11th hour. The Nasdaq (NASDAQ: QQQ) and S&P 500 closed down 2.1% and 0.9% respectively, while the Dow Jones (NYSEARCA: DIA) managed to marginally cling to green territory.
So, what on earth went wrong?
Why did the rally collapse?
As has happened several times already this year, the market’s volatility can be linked back to vaccination news. The big names behind the market’s early optimism were Pfizer (NYSE: PFE) and BioNTech (NYSE: BNTX), which announced that their respective COVID-19 vaccine candidates had received Fast Track status from the FDA. Fast Track is a process to expedite the review of new drugs and facilitate their development. Pfizer’s and BioNTech’s BNT162b1 and BNT162b2 are currently being evaluated in Phase 1/2 clinical studies in the U.S. and Germany.
Optimistic investors appear to have missed the fact that this designation does not mean that there is an effective vaccine in the works, but rather that greater resources are being poured into these specific companies. This realization hit later in the day, coupled with news that California would be re-closing due to escalating cases. Should more states look to close, it is likely that the market will fall in a similar fashion to March’s crash.
What about recent gains?
Recently, a lot has been said about Big Tech’s role in driving the market rally, while I myself am guilty of hyping up the likes of Tesla (NASDAQ: TSLA) and Nvidia (NASDAQ: NVDA) as the next big tech companies. Tesla alone gave up a 16% gain on Monday in the final hour of trading to close down 3%, proving just how volatile the EV giant can be, which apparently sees 10,000 investors buying its shares every hour.
However, with the likes of Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Google (NASDAQ: GOOG), et al. hitting all-time highs for fun lately, it was easy to get wrapped up in the optimism, even as the economy nosedived and unemployment rose. This disparity between the stock market and the economy appears to finally be catching up — although I have said this many times already and been proven wrong.
However, it is unlikely that Big Tech will get caught up in a market-wide sell-off for too long as yesterday’s fall appears to be fear-driven after California’s Governor Gavin Newsom ordered indoor operations for fitness centers, malls and places of worship, among others, to shut down. This reclosing of the economy was the very reason Big Tech soared in recent months as more people flocked to subscription services (Apple, Netflix), at-home tools (Microsoft), social media sites, and search tools (Google, Facebook), and e-commerce (Amazon).
The same optimism cannot be given for companies that rely heavily on foot traffic such as Starbucks (NASDAQ: SBUX), Macy’s (NYSE: M), and all the rest who will suffer dreadfully in the case of further closures.
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What can we expect this week?
I’ve found out the hard way that there is no easy way to predict the market. Although it seems like earnings season just ended, we are actually just entering the opening stages of Q2 reports, which will bring its own volatility to the table. Whether there is any need for quarterly reports is another argument altogether, but the big banks will be reporting this week, with JPMorgan (NYSE: JPM) and Citigroup (NYSE: C) set to share their books with us later today.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.