Earlier this week, the stock market came to life with a spectacular rally. These were propelled by influential statements from former President Donald Trump specifically targeting China and the Federal Reserve. On Wednesday, the Dow Jones Industrial Average fell as low as 1,100 points at its worst moment. It marked the end of a four-day losing streak with a meteoric gain of 1,000 points. This renaissance is driven by the unique political will and the current market forces. Short-covering has had a strong presence in recent days, adding even more dynamism to this momentum.
It was really Trump’s comments that proved to be the market’s turning point. He first attacked Federal Reserve Chair Jerome Powell. He added, “Termination can’t come soon enough.” Trump soon reversed himself, stating explicitly that he’s not going to fire Powell. This unlikely development added to a general air of calm in the markets, encouraging bullish sentiment among investors.
At the same time, the S&P 500 index rose 3.5% so far this week, its pair of winning days in a row. Analysts admit that reducing global uncertainty over trade has greatly supported stock performance. The continued positive momentum is certainly a good sign. Yet without real trade deals, market players continue to show a guarded sense of optimism.
John Flood, a managing director at Goldman Sachs, stated, “Squeeze risk is real today,” highlighting the impact of short-covering on stock prices. Traders went for broke on the long side both Tuesday and Wednesday. This combination of motivation caused by Trump’s statements and a clear market turnaround resulted in massive short-covering rally.
Stocks initially showed big gains, especially on indications that trade tensions were beginning to de-escalate. Yet as the rally rolled on, the Dow was going through a bit of a pullback by Wednesday midday. Yet somehow it was only able to rise by 500 points. This reversion is just another testament to how fickle the market can be and how quickly sentiment can turn on a dime.
“There is an opportunity for a big deal here.” – Scott Bessent