- The S&P 500 benefited from significant global liquidity in the second and third quarters of 2020.
- Global liquidity threatens to decline now as COVID-19 cases rise, but strategists are sounding the alarm over weak incentives.
- Large European nations are re-establishing new restrictions and creating more chaos in the economy.
In the past six months, the S&P 500 hit new highs due to increasing liquidity around the world. However, there is a risk that liquidity will weaken after strategists warn of the impact of below-average stimulus packages.
The US continues to find itself in a cyclical crisis as Republicans and Democrats struggle to reach consensus on a number. France has passed a € 100 billion economic stimulus plan It might not be enough to offset rising COVID-19 cases.
Other large European economies, including Spain, need additional stimulus as governments introduce new restrictions.
The S&P 500 and Tech-Heavy indicators are at risk due to a lack of incentives and liquidity
In the second quarter of 2020, governments initially launched multi-trillion dollar stimulus packages that were expected to be one-off.
By May, the outlook for vaccine development and treatment of the pandemic was positive by the end of the year.
The stimulus resulted in an increase in global liquidity and eventually the S&P 500 rebounding above pre-pandemic levels.
At the time, governments did not expect the pandemic to be in a worse position in the fourth quarter than in previous quarters.
Some nations, including New Zealand, Taiwan, Vietnam, and South Korea, have controlled the pandemic relatively well. But countries like the US, Spain, and France stand out a resurgence of cases or a second wave.
As the markets entered the fourth quarter, sentiment began to change. The clash of election risks, the slowdown in the US economy, and lack of incentives caused the S&P 500 to stagnate.
The lack of a stimulus could be imposing additional selling pressure on the S&P 500 in the coming months.
There are less than a month until the next presidential election. In theory, it is not in Democrats’ interests to actively promote approval of new incentives.
Major investment banks have identified stimulus and liquidity as the main catalyst of the S&P 500. Given the importance of liquidity in the face of the greatest fear in the markets, the stock market remains at risk of retreat.
In July, JPMorgan strategists, led by Nikolaos Panigirtzoglou, said “More debt, more liquidity, more asset reflation” fueled the stock market.
JPMorgan strategists wrote in a note:
“Increased cash holdings create strong background support for non-cash assets like bonds and stocks. Most of that liquidity will eventually flow into stocks as the need for retirement savings diminishes over time. “
The increasing uncertainty in the global stock market coupled with the free falling economy poses a serious threat to the recovery of the S&P 500.
Strategists fear that the uncertainty in the markets will continue to grow. Check out the video below:
Paris, Madrid and major European cities on alert
Across Europe, key industries such as travel, leisure and food have problems.
Speaking to El Pais, a local security officer named “Margarita” said The bars, restaurants and cafes remain deserted. She said:
“Empty? It’s abandoned here. I’d say at least 90% less. There are usually fewer people around on weekends, but that’s different. You must be scared, I suppose, but you can travel from here without any problems. In fact, have.” we do not receive any special instructions and there are no police surveillance measures. “
Despite the struggle of local businesses, governments are again imposing new restrictions. The rapid decline of the major economies may not have an immediate impact on the S&P 500 in the short term. But over time it is could affect overall business and labor productivity.
Disclaimer: This article reflects the author’s opinion and should not be viewed as investment or trading advice to CCN.com. The author has no investment position in the above securities.