Is a New Strain of COVID Infecting the Markets?
Posted December 21, 2020
Stocks are a sea of red this morning based on news of a new strain of COVID-19 in the UK.
Stocks were already due for a pullback of sorts. They had been on a tear since early November when they broke out of a three-month consolidation range (red box in the chart below).
The issue now is determining whether this drop is just a brief dip, or the start of something larger.
The bullish case is that fund managers are performing terribly this year, and will be eager to juice their holdings higher to finish the year with the highest possible returns.
The bearish case is that with a new strain of COVID-19 appearing in the UK, investors will be terrified of another round of economic lockdowns.
The One Thing That Is Certain
Will the “Santa rally” continue or will COVID-19 once again shutter the global economy? Who knows?
The one thing that IS clear is that policymakers will respond to this new strain of COVID-19 the same way they responded to the first: by printing more money.
Consider that from 2008-2016, the Fed printed some $3 trillion to combat the Great Financial Crisis and its aftermath.
To combat the economic fallout from COVID-19, the Fed printed that same amount of money in seven months this year alone.
The Fed is not alone here. Globally, between central banks interventions and government stimulus, policymakers have devoted a jaw-dropping $15 trillion this year to COVID relief.
This is going to unleash an inflationary storm the likes of which we’ve not seen in decades.
And the markets know it.
Gold has exploded higher in $USD, Euros, and Yen. They recently dipped lower on hopes that a vaccine would fix the COVID-19 situation. But with the appearance of a new strain of the virus threatening more shutdowns, we can expect a new round of money printing, which will ignite a run in gold to new all-time highs.
Editor, Money & Crisis