Two weeks ago the subtitle for my weekly review of the stock market was “Uncertainty Rules.”
After this past week, one can strongly argue that “Uncertainty Continues to Rule.”
The VIX index for market uncertainty was up around or over 30.00 all week.
The swing in the market this week is really noticeable.
At the close on Tuesday, the S&P 500 stock index had already shed 1.0 percent for the week.
Note: this took the decline in the index since January 3 to be more than 10.0 percent, indicating that the market was actually in a correction, its first correction in more than two years.
The market continued to decline on Wednesday and most of Thursday.
Since then, as can be seen in the chart, the stock market turned almost perpendicularly to wipe out most, if not all, of the losses for the week.
The S&P 500 closed the week at 4,385 up from the close on Friday, February 18 of 4,349.
The NASDAQ closed the week at 13,695 which was up from the close at the end of the previous week of 13,548.
And, the Dow-Jones Industrial Average closed on Friday at 34,059, down modestly from the close one week earlier of 34,079.
So, no harm, no foul. The market ended much as it started.
But the market did move during the week and it is important for us to get some feel to how investors were reacting to the news during the week.
The stock market had been falling for the two weeks prior to this last week.
For example, the S&P 500 closed at 4,501 on February 4. On February 11, the S&P closed at 4,419, and, as was said above, the market closed at 4,349 on February 18.
The reasons given for this drop were twofold.
First, the Federal Reserve had been tapering its monthly purchases of securities and was planning to stop tapering in March, and once the tapering stopped the Fed was on record to raise its policy rate of interest.
This expectation had been impacting the market since November and December.
Second was becoming more and more obvious that Russia might invade Ukraine. This expectation also resulted in the recent decline in the stock market.
Then, on Monday, which was a market holiday in the United States, the Russians began to attack the Ukrainians.
This latter move resulted in the stock market turning downward beginning on Tuesday.
The Rationale For The Market Turnaround
The best and most concise explanation for the movements in the market this week comes from the pen of the Wall Street Journal’s commentator James Mackintosh.
Mr. Mackintosh gives us two reasons for the market rise at the end of the week.
First, Mr. Mackintosh suggests that: “The sanctions imposed on Russia were less bad than they could have been.”
In other words, President Biden could have been much rougher on the Russians with sanctions. In fact, investors were fearing “a bigger hit.”
So, one reason for the market reacting in a positive way on Thursday afternoon was that investors felt that the sanctions imposed were weaker than expected. Hence, the stock market rose.
Second, Mr. Mackintosh argues that the Federal Reserve is now “expected to slow the pace of rate rises a bit.”
“The probability of rates rising from zero now to 2.0 percent in a year’s time dropped from more than a third to just over a quarter.”
“Investors who think there’s less risk of really extreme Fed moves are more willing to take risk” in the market and so started buying stocks again.
Mr. Mackintosh concludes his article with this appraisal.
“For now it looks like traders are judging that Ukraine will not be bad for Wall Street.”
However, the situation in Ukraine makes it less likely that the Fed will be too severe in raising its policy rate of interest.
Remember, Jerome Powell, the Fed chair, likes to err on the side of monetary ease.
Mr. Mackintosh also asks us to remember.
He writes: “remember two things: Just a few days ago the same people judged that a full-on invasion was unlikely and that if war makes stock rise, peace – the sound of trumpets – should herald a pull back.”
“At the very least, expect markets to keep swinging about.”
It is a time of Radical Uncertainty.
We do not know what some of the possible outcomes relating to our future might be.
One Final Note On Bitcoin
On Thursday, after the Russian invasion began, the market for Bitcoin did not move as some had expected.
The price of the Bitcoin was down as was the price of stocks.
Other assets, like the US dollar, were trading higher.
This was not what many in the crypto-community were looking for.
And, it just showed that the price of crypto-assets was moving with the US stock market.
Current research has indicated that the correlation coefficient of the price of Bitcoin and the S&P 500 index now stands at a record high of 0.56.
Bitcoin was conceived to be a medium of exchange first and a store of value second.
What this correlation coefficient is showing is that Bitcoin is not looked at as a medium of exchange, at least as its dominant characteristic.
That is, if people do not consider Bitcoin to be a medium of exchange, then it has little or no productive abilities. Bitcoin is just nothing.
At 8:15 am on Thursday morning, Bitcoin was selling for only $ 35,244. Remember on November 9, 2021, when it was selling for $ 67,415?
Bitcoin seems to be moving pretty closely with the US stock market, but it also experiences much more volatility in its price than does the stock market.
One other point. Lael Brainard, present Federal Reserve Governor, who has been nominated by President Biden to be the next Vice-Chair of the Federal Reserve, stated in a speech given on February 18, 2022, that the market capitalization of the crypto market in November was around $ 3.0 trillion.
On February 18, she announced that the market capitalization had dropped to around $ 2.0 trillion.
CoinBase, a news link for the crypto world, indicated that this number had now dropped to $ 1.5 trillion.
Yes, investing in crypto-assets is risky … the market is volatile.