When the coronavirus pandemic emerged, fear rose, and stock prices plummeted. In fact, stocks fell faster than at any time in history, reaching a bottom March 23, six weeks after it peaked. In response, the U.S. government, along with the Federal Reserve, initiated a series of fiscal and monetary policies to lessen the impact on the economy and financial markets. Few, if any, knew how effective this would be at the time. However, there was great hope that it would ease the pain of the American people. With the November election just six weeks away, it appears that the positive effects of the stimulus are quickly fading, and a period of economic and market turmoil is imminent.
Earlier this year, I compared the movement of the Dow Jones Industrial Average during the Great Recession and every recession since, to the current crisis. I examined the length of each recession, identified the point when stocks reached their ultimate bottom, and how investors fared in each downturn. One conclusion was that stocks, on average, reached their ultimate bottom when the recession was 61.4% complete. Moreover, in 6 of the past 14 recessions, stocks didn’t reach their ultimate bottom until the recession was more than 80% complete. In short, it was extremely rare for stocks to hit their ultimate bottom in the early days of a recession. However, this time, things were different. Enter, massive government stimulus.
As mentioned, no one could have known how effective the stimulus would be when it was launched. I think we can safely say that it saved the day, albeit temporarily. But as the November election draws near, the effectiveness of the stimulus is quickly fading. Here’s one example. When the federal unemployment subsidy ended, millions of workers in the leisure and hospitality and related industries were left out in the cold. Although unemployment has fallen faster than expected, the number of weekly jobless claims remains extremely high. This begs the questions: Can the U.S. economy thrive with so many out of work? And how will the stock market perform without another round of stimulus?
The following chart shows how the stock market has performed thus far compared to the Great Depression of the 1930s. I use the depression because this recession is the worst economic downturn since then. Note how stocks reacted during the depression (red line). There were several declines and rebounds along the way. It’s also worth noting that the Hoover administration did little to intervene. Thus, in comparing the two, we have one period with little government intervention (Great Depression) and one with massive federal intervention (2020 recession). There is something quite interesting here.
Congress passed the CARES Act Friday, March 27. Stocks bottomed March 23, just four days earlier. On Tuesday, March 24, investors believed the CARES Act would pass and began to buy. The increased buying pressure pushed stock markets back to, or near to their previous highs. However, with the increase in political rhetoric, hopes of another round of stimulus waning, and a potential Biden presidency coupled with higher taxes, investors are taking profits which is pushing stock prices lower. Exactly how low remains to be seen.
As we wrestle with the realities of the pandemic and its effect on businesses and individuals, financial markets will likely experience greater volatility as investor fear rises and selling pressure increases. Thus, we may be in for a difficult period leading up to the November election, perhaps beyond. For example, if it appears Biden will become the 46th U.S. president, selling pressure will likely rise through the end of the year as investors take profits to avoid higher tax rates. Will we see another round of stimulus before the election? Perhaps bits and pieces, but a comprehensive package is unlikely as each party is doing its best to win in November. Therefore, stock investors should be more careful over the next few months.