The stock market, having been largely resilient since the initial COVID-19 downturn, has experienced its first hiccup post-recovery. With the pandemic still raging, there’s the consistent threat that there could be more stock market tumult on the way due to the coronavirus, but that analysis is incomplete. The real determining factor of how the stock market will perform as we close out 2020 is going to be the U.S. federal government’s response. More specifically, if we’ll see a stimulus package or not.
Right now, people across the country are hurting, which is being borne out by a number of metrics, like potential eviction rates and those on unemployment.
As many as 40 million Americans faced potential eviction before a Centers for Disease Control and Prevention mandate instituted a legal block on evictions, for the time being. (Source: “Most evictions in the U.S. are now banned. What you need to know,” CNBC, September 8, 2020.)
With millions of people struggling to make ends meet, it would only make sense that we would see at least some struggling on the stock market. Except that didn’t happen. Despite the pandemic only getting worse, at least in terms of impact on the average American worker, this was not reflected by a waning stock market.
Leaving aside what that says about the system itself, one small benefit of that dissonance was that investors were able to eke out huge profits in that time. In fact, for those who had lost jobs or income, the stock market provided a viable way to supplement at least some of that loss for those who had the capital to invest.
But now we’ve seen that massive stock market boom come to a stuttering stop; and whether this proves to be a prolonged stoppage or minor hiccup, in large part, lies in the U.S. federal government’s hands.
You see, at the start of the pandemic, we saw an infusion of money into both Wall Street and Main Street. With the unemployment supplement hitting $600.00 a week, poverty in the U.S. actually experienced a decline despite millions finding themselves without a job. (Source: “$600 A Week: Poverty Remedy Or Job Slayer?” NPR, July 27, 2020.)
The economy, as a result, saw a massive influx of activity, as people were able to purchase things with this newfound money. It ended up being one of the single most effective counters to the financial devastation wrought by the pandemic.
But that supplement has now expired, meaning that millions of people are once again on the brink of financial disaster. And with that fear comes a natural inclination to buy less stuff. That’s simple math.
Are We in for an Extended Market Downturn?
Without another injection soon, we’re likely to see that economic fallout continue to harm U.S. workers and, in turn, harm the stock market.
While tech stocks and the stocks of other emergent industries whose values are predicated on future earning potential, the near-term economic situation didn’t factor too heavily into their growth moving forward. But, with so many people retreating from a consumer-reliant economy, it was only a matter of time before we started to see some of that pain being felt in banks, consumer-facing tech companies, and other larger institutions.
The result, then, is the stock market fall we’ve experienced now, which has finally extended to tech stocks and emergent industry stocks.
But there’s another important part of this story: Wall Street was anticipating a bailout.
It received one earlier on in the pandemic via the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was similarly bolstered by the increased spending capital of Americans via the unemployment supplement.
With both those programs having run their course, however, Wall Street anticipated a second infusion of capital either directly to people or to businesses, neither of which has happened.
In fact, there’s little hope that the government is going to get any major stimulus package passed, as both Democrats and Republicans face a wide chasm in priorities. (Source: “Democrats block slimmed-down GOP coronavirus relief bill as hopes fade for any more congressional support,” The Washington Post, September 10, 2020.)
The result, then, and the most important news from an investor’s perspective, is that we may be in for a prolonged downturn in the market. But that’s not necessarily a bad thing.
After all, with tech stocks performing as well as they had been over the past few months, it only made sense that a correction was lying in wait for many of them.
With the Wall Street delusion regarding a bailout now being shed, we’ll likely see a realigning of share prices with conservative valuations. That, in turn, creates a buyers’ market, as many investors who felt left out by the original rush can now buy back in at a discount and reap the rewards of any future stimulus or government aid program that could come down the line.
And, frankly, I believe that’s exactly what we’ll see in the near future.
Regardless of how the presidential election turns out, there’s going to be a shakeup in Congress that is right now looking like it will favor the Democratic Party.
With more voices calling for a stimulus and a prolonged economic downturn looming, the president (whomever it may be) and Congress will be forced to make some manner of bold recovery play that will in turn spruce the market right back up.
In other words, playing the long game right now on the stock market could yield huge dividends down the line.
This is the most political stock market in a long while. What I mean by that is that we’re experiencing a stock market that is very reliant on political machinations, more so than usual due to the dual events of a pandemic and a presidential elections.
They’re individually momentous; combined, they have come to create one of the most volatile—and potential-rich—stock markets in ages.
The fact of the matter is that stocks will be seeing steep falls and rapid gains in the coming months and year, and being able to time it just so is going to be key to eking out massive gains on your portfolio.
With current political inaction and uncertainty leading to a down market, now is a good time to reinvest to profit from the near inevitable certainty that government will step in to tip the scales once more in the near future, lest they let the entire economy collapse under their watch.