My eldest son and I have a lively online conversation which has gone on for years. We disagree about a lot but recently we have agreed that the stock market is heading towards a crash. Not an if, a when. Oddly, we both see the end of September as the likely date. Simon cites market history, I am inclined to go with people understanding “events” and responding to that understanding. Here are a few.
The American Election Whether you are a Trump fan or a Biden supporter does not matter because the Election itself is the market event. Markets could live with either a Trump or a Biden victory; what they cannot live with is the growing possibility that the Election will not be decided on Election Day. In critical states such as Wisconsin, Michigan and Pennsylvania, mail in ballots cannot begin to be counted until the polls are actually closed on Election Day. (You can get all the details in this excellent article, Why We Are Facing The Biggest Election Nightmare In Modern American History No Matter Who Ends Up Winning by Michael Snyder.)
Leaving aside the issues of fraud which arise with mail in ballots, the biggest problem is just how unlikely it is that we will know who has won the Presidency for days, perhaps weeks, after the polls have formally closed. The very definition of uncertainty.
Markets hate uncertainty and as the likelihood of a protracted vote count becomes more obvious the overall market is likely to become, in a word, skittish. Given that the general markets in the US, and to a degree in Canada, are already at all time highs, that will certainly tend towards defensive selling and profit taking. Which, in normal times, would actually be healthy. But these are not normal times.
COVID I think a plausible argument can be made that COVID, the disease, is abating. Case counts may pop here and there but that is almost always an artifact of more testing. Hospitalizations and death counts are low and going lower. The return to school will probably pop case counts in some places, but it is unlikely to have much impact on how many people get really, really sick. As one writer said about Sweden, “All the kindling is gone.” Which is pretty harsh but also, likely, accurate. COVID kills the elderly and the compromised; it is no fun for the rest of us but it is survivable.
However, the economic consequences of COVID, consequences which are entirely political rather than medical, are ripping through Western economies. Lockdowns, business closures, mandatory masking, broad layoffs, work from home, mortgage deferrals, evictions and eviction moratoriums are all in full swing. The idea of flattening the curve has given way to the goal of either avoiding or mitigating “the second wave”. The “vaccine” is variously “a month or two away”, “ready in 2021” or “very unlikely to be effective whenever it’s ready”.
Of course, the entire COVID “crisis” has become politicized with those on the left convinced that without masks and shutdowns we will all die, and those on the right certain that unless the economy restarts we’ll all die poor. Maskers see non-maskers as selfish, non-maskers see masks as a symbol of conformity. Democratic states wear their masks and their crashing economies as proud symbols of anti-Trump resistance. And so on.
From the market’s perspective the main effect of COVID is the creation of fear and uncertainty. While there are plenty of Robinhood traders happy to make good money day trading, there are also plenty of people eyeing the exits and wondering if “the top” has, in fact, arrived. The Robinhooders represent a tiny fraction of the very deep American stock market. If, as will almost certainly happen, they are hit with significant losses on their most recent FANG trades or if Tesla sinks like a stone, the overall markets won’t miss them. However, if the broader market becomes worried, the dash for the exits could be very ugly indeed. A so-called “second wave” of COVID, even if it is largely fictional could trigger a rush to cash out.
Antifa, BLM, protests, riots and arson In themselves, the various demonstrations and riots inspired by BLM and made nasty by Antifa, are largely irrelevant to all but a few hundred square blocks of a few American cities. (Yes, the craven pandering of big business and major league sports is obnoxious, but it is also very much a passing moment.) Applying a bit of crowd control and arresting leaders and organizers can, and has, shut the riots down where it has been allowed by politicians to happen. So far, BLM and Antifa have been denied the martyrs they need to grow.
In terms of economics, Antifa/BLM have caused several billion dollars worth of damage and made retailers more reluctant to locate in certain areas of certain American cities. However, America is a big place with a big economy, so the costs are relatively tiny. (Not so tiny for small businesses which have been torched.)
Psychologically and politically, the idea that there are nightly riots and that downtowns of relatively small cities like Kenosha could be razed is just one more shock to the system. The fact that police forces have been told to stand down in the face of the rioters and that state level prosecutors have declined to charge the rioters, erodes the faith people have in the overall system.
The fact that there are disturbances virtually every night drives home the message that there is no safety in the US. This is not actually true, the bulk of the United States will never see a BLM/Antifa protest much less riot; but that doesn’t actually matter. The riots and the seemingly impossible to appease demonstrators create a mood, a sense of unease.
Markets reflect the confidence of investors. Where that confidence is eroded the conditions are created for a crunch.
March and the Second Wave In late March we had what people called a mini-crash. The Dow, S&P 500, NASDAQ dropped hard as did the markets in other G-20 countries. At one point virtually every market in the world was off 25%. At the time commentators suggested this was a one time reaction to the economic effects of COVID.
The March crash very quickly reversed itself. The Fed turned on the money pipe and markets all over the world staged V shaped recoveries to the point where, last week the DOW, S&P 500 and NASDAQ were all at or near their all time highs.
But is it real? The March mini-crash suggested that the markets could be spooked easily. That they could recognize the immense economic implications of COVID. However, the speed of the recovery to new highs, suggests that the mini-crash did nothing to re-align the market’s value with the underlying realities of a collapsed GDP, very high unemployment and an accelerating “real” inflation rate.
Market crashes are sometimes triggered by a single event, the collapse of a bank, a commodity crash, or even a small war; but, more often, they happen when investors “lose confidence”. The end of the dot com bubble was not about the internet suddenly being useless, it was about millions of people saying, at more or less the same time, none of these dot com companies make any sense at these prices. It also happened when the overall economy was strong, American politics were in balance and there was no political pandemic battering the real economy.
The V shaped recovery from the March mini-crash suggests strongly that the real “correction” has not occurred yet. Remember, that in the dot com bubble and crash the NASDAQ went from a high of 4798 in March 2000 to a low of just of 1000 in two years.
Currently, the NASDAQ is at 11,313.
Jay Currie 