Historically, civil unrest had little impact on the stock markets. Will things change now?
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The United States was slowly starting to recover from the pandemic that had nearly the entire country under lockdown for weeks. But just as things seemed to start going back to normal, the country has been rattled by what appears to be the biggest civil unrest of this generation.
The protests began on May 26 in Minneapolis but rapidly spread nationwide. What triggered these civil uprisings was the killing of George Floyd, an unarmed black man, by a white police officer. In some parts of the country, they have turned unnecessarily violent.
Such news is believed to shake the financial markets, but even though confrontations between the racial justice protesters and police are far from ending, the stock market doesn’t seem to move anywhere but up. But how can it be so?
Historically, we have created many precedents
Back in 1968, when much violent and deadly protests took place all over the U.S. following the assassination of Dr Martin Luther King Jr., equity markets were still standing strong. Going further back we can observe that even after events such as the 1967 Vietnam War protests and the assassination of President John F. Kennedy in 1963, the S&P 500 reported annual gains ranging from 4% to 20% in all of these years. Why so?
If this were to happen in an undeveloped country, the outcome would have been much more impactful on the financial markets. However, in developed countries, these events are perceived as alarming but controllable. The U.S. is viewed as a law and order country, and everyone expects things to go back to normal soon.
History tells investors they should look past the protests and continue betting on a strong economic reopening following coronavirus lockdown.
In over one week since protests began, the S&P 500 has gone up nearly 3%, showing clear signs of disconnection between the economy and the financial markets. This was also confirmed by Mohamed El-Erian, chief economic adviser for Allianz, in a recent interview.
Does it mean that Wall Street immune to riots?
An important aspect that seems to be overlooked following recent events is the fact that part of the market’s success following the lockdown is owed to the Federal Reserve, which made a historical intervention to help the economy recover. Nearly $3 trillion were injected into the financial markets in the past three months; something that has never happened before.
Paired with a number of other emergency initiatives such as lending programs, credit facilities and rate cuts, these moves by the Fed are reassuring investors that the Central Bank is ready to jump in and help if and when the financial system needs it.
These actions have helped keep the economy stable and survive both the ongoing pandemic and riots. The market is not looking at what’s happening today or tomorrow, but at what repercussions these events can have on the long term.
The events are painful to watch and will likely take some time before they stop, but they are not going to affect the market, or at least this is what experts believe. It’s not necessarily that Wall Street is immune to riots, but form an earnings standpoint, which is ultimately what the market follows, they are not perceived as a threat. That’s because the market is not looking at 2020 anymore, but at the following years.
The markets are looking at when the U.S. economy is going to restart from the COVID-19 lockdown, rather than these civil unrests. If, and only if, these riots start to hurt consumers confidence, that’s when we can expect stock prices to lower.
What should we keep an eye on?
Protests will undoubtedly continue for the following days and even weeks, but if they last longer than expected, that’s when the markets could start viewing them as a threat. These ongoing protests could lead to a few dark scenarios that could really hit the U.S. economy and financial markets.
These civil unrests are standing in contrast to the ongoing social distancing guidelines and could spark a second wave of coronavirus infections. Whatever stay-at-home measures were still in place, they have little to no value now. Not even imposed curfews are keeping people off the streets.
Just before the protests, the U.S. started seeing a decline in new cases, but experts fear these riots could have severe healthcare implications. A second wave could hit the U.S. in the following weeks, keeping businesses further closed.
Consumer confidence is already shaking as more than 40 million Americans filed for unemployment in the past few months. In May, however, consumer confidence started to improve slightly, but the ongoing protests could make it crumble again, and that’s when issues will begin to surface.
What’s happening to the U.S. dollar?
Stock markets seem to have it going well despite the protests, but the U.S. dollar continues to stay under the microscope. The U.S. is already running a $4 trillion deficit this year, and the demonstrations will likely add more to this amount.
There is a lot of pressure hanging over the U.S. dollar as the Forex market shows the dollar fell against most currencies on June 3. Investors seem to redirect their funds towards economies such as Australia, the U.K., and parts of the E.U, which appear to be recovering the fastest from the pandemic.
As individuals are looking to grow their wealth, more and more seem to find the forex market a very promising environment. Brokers provide a variety of options for traders including copy-trading, a strategy that involves copying the actions of more experienced traders and gaining profits.
The cryptocurrency market seems to be standing strong as well, with Bitcoin blasting $10,000, the highest since February this year.
Following the first week of protests, the popular opinion seems to be that a large part of this wave of protests is rather economically than racially driven. The African-American community was hit hard during the pandemic, with many people losing their jobs or even houses. This, fueled by the anger sparked by recent events led to the events we are now witnessing.
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