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Is There More Downside to the Stock Market Prices?

June 15, 2020 By Mircea Vasiu

The U.S. stock market has proved to be the de-facto market leader to the investment world in the days since the coronavirus pandemic started. Often, the volatility in other assets increased significantly during the cash market was open, while decreasing sharply in after-hours. 

Last week the markets had an ugly reaction to the Fed’s monetary policy message. While keeping the federal funds rate lower and committing to leaving it there for a long time, is a message of expansionary monetary policy, the stocks collapsed and closed the week well in the red.

What lies for the week ahead?

US Stock Market in the Week Ahead

Several factors are worth mentioning that may affect the stock market in the United States in the days to come. As mentioned earlier, it is not only about the stock market – the currency market has also been very correlated to equity moves in 2020.

On the one hand, changes in valuations will likely drive volatility this week. Yes, the stock market is expensive relative to the discount rate, but if we consider the lower bond yields than higher multiples have an explanation and can be sustained moving forward.

For example, the 1996 economic growth in America led to the fear of a stock market bubble. The Fed Chair at the time, Alan Greenspan, warned about irrational exuberance – but the stock market did not trade at multiples as high as the ones we see today.

Nowadays, the twelve months price-earnings ratio for the S&P500 is 21x, but bond yields are well below 1% when compared with 6% in 1996. Therefore, higher valuations may be justified by lower bond yields.

On the other hand, this week marks an important milestone in the European “adventure” of joint debt issuance. This week’s European Council meeting may end up being important for the Euro and Euro investable assets.

If the European Council’s message is positive and a consensus is reached on the recovery fund, the positive sentiment is enough to be responsible for a risk-on move that may prove contagious to other stock markets in the world.

Last but not least, Q2 corporate earnings will start hitting the headlines, and we will see some high volatility, especially in after-hours trading. If the market manages to rebound from this selloff, it will do that on a combination of both positive economic data and further improvements on the macro stage.

Any positive news out of the pandemic battle will only spur more enthusiasm.