Wall Street is (I hope) discovering that the Fed can't wave a magic wand to make problems disappear.
As you know, the stock market has been in chaos for the past month. Four times it had dramatic, even historic declines — 7%, 10%, 13%, and just yesterday over 6%. But it also had a day of gaining 9% after Trump declared a national emergency, 5% on a spike after the first time the Federal Reserve indicated it would act, and a sharp spike the first time Congress announced legislation.
What are the lessons? Wall Street is stupid.
Here is my take on Wall Street. Investors read about the coming recession and sell. The market collapses. Then they read about the Fed or the White House or Congress taking action. The market shoots up. Then they read more bad news, and the next day there’s another collapse. This cycle of ups and downs has repeated over and over.
What are the lessons? Wall Street is stupid. It has a short memory and low long-term vision. Investors really think the federal government can wave a magic wand and make any problem disappear. Now Wall Street is learning that is not true, and stocks tumble. In the long term, it seems that the market will be down 25% to 40% from its peak in February 2020.
Wall Street is learning that the Fed is mortal, not a deity.
As the virus crisis unfolds, there will be much antilibertarian sentiment, to the effect that we need a social safety net, socialized medicine, etc. Instead of replying by talking about what capitalism can do, let's talk about what government cannot do. It can't find a cure by magic. And it can't create money by magic. It cannot eliminate the economic damage caused by the coronavirus. It has no magical powers. This is not a crisis that government will solve. It is a crisis that we as a human species will overcome.
Now that Wall Street is learning that the Fed is mortal, not a deity, if you own stocks, strap on a helmet. You're in for a volatile, rough ride. As are we all, in the months and year to come.