CNN Business/Matt Egan
The stock market is flashing a warning sign
Signs mounted all summer that the meteoric rise in the stock market was unsustainable.
Bullish investors drove Tesla’s market value roughly equal to that of JPMorgan Chase (JPM) and Citigroup (C) — combined. Apple’s (AAPL) $2 trillion market cap recently surpassed that of the 2,000 companies that make up the small-cap Russell 2000. And the S&P 500’s forward market valuation climbed to levels unseen since the dot-com bubble.
Euphoria was clearly taking over financial markets.
The runaway train on Wall Street was finally derailed Thursday, when the Dow plummeted as much as 1,026 points, or 3.5%. It closed down 808 points, or 2.8%.
The Nasdaq tumbled as much as 5.8% as pandemic winners like Apple, Zoom (ZM) and Peloton (PTON) tanked. Even mighty Amazon (AMZN) dropped 5%, though it remains up an incredible 82% on the year.
Now, the question is whether the rally will quickly get back on track or if this is the start of a bigger pullback in the stock market.
One warning sign suggesting more turmoil could be on the way is unusual movements in the closely-watched VIX volatility gauge.
Normally, the VIX (VIX) is muted when US stocks are at record highs. But some market analysts grew concerned in recent days because the VIX kept rising — even as the S&P 500 made new highs.
In fact, the VIX hit its highest level ever at an all-time high for the S&P 500, according to Bespoke Investment Group and Goldman Sachs. The previous high was set in March 2000 during the dot-com bubble.
“It is a significant red flag,” Daryl Jones, director of research at Hedgeye Risk Management, told CNN Business. “The market is at a very risky point. It heightens the risk of a market crash.”
‘We could have another 10% fall, easily,’ El-Erian warns after big sell-off
Wall Street could be headed for correction territory if there is a shift in investor attitude, Allianz’s chief economist Mohamed El-Erian said after the biggest market decline in months.
Investors have taken a liquidity approach to the market and buying the dips, thanks to stimulus action from the Federal Reserve. That mindset will be tested in the coming days as market fundamentals come into play, he said in an interview on CNBC.
“That is the tug of war that’s going to play out, and it’s going to show the DNA of investors,” the chief economic advisor said on “Closing Bell” after major indexes recorded their worst sessions since June.
The Nasdaq Composite, which has rallied hard over the weeks, tumbled nearly 5% on Thursday as high-flying tech stocks took a breather. The S&P 500 and Dow Jones also suffered big losses, dropping 3.5% and 2.8%, respectively.
If a mindset shift is looming, El-Erian suggests market players should look out below.
“We could have another 10% fall easily … if people start thinking fundamentals,” El-Erian predicted.
USA Today/Paul Davidson
Fund That Beat 82% of Its Peers Sees Gold as Safe Election Play
The nation is awaiting a vaccine that can halt the COVID-19 pandemic in its tracks, allowing life – and the battered U.S. economy – to return to normal.
But a new study suggests the crisis has generated fears that are likely to dampen risk-taking and economic output for decades by increasing the “perceived probability of an extreme, negative shock in the future.” Over time, the economic cost of that warier outlook is “many times larger” than the short-term damage, the study says.
The study, titled “Scarring Body and Mind: The long-term belief-scarring effects of COVID-19,” attempts to quantify such long-term economic losses by assessing the toll taken by other economic upheavals, such as the Great Recession of 2007-09.
“While the virus will eventually pass, vaccines will be developed, and workers will return to work, an event of this magnitude could leave lasting effects on the nature of economic activity,” says the paper, which was released at the Federal Reserve Bank of Kansas City’s annual conference last week. “Businesses will make future decisions with the risk of another pandemic in mind.”