After a miraculous recovery in May and April, volatility is back on Wall Street. The Dow Jones fell more than 6% on Thursday, shaken by a grim outlook by the Federal Reserve. Optimism for a quick recovery is wavering, and a booming stock market is showing signs of slowing down. Joe Biden presents another fear for the market; if he wins, he will be far less business-friendly than his predecessor.
A Major Rally in May
The stock market may be having a rough week, but it’s still well above the lows it hit in March. On Friday morning, the Dow Jones Industrial Average was still above 25,000. In March, it had nearly erased all gains made since Donald Trump’s election. Public health measures in response to the pandemic wreaked havoc on businesses, and investors feared that the US economic engine was running out of fuel.
Federal and state governments responded with major stimulus efforts, injecting trillions of dollars into the economy. Much of the federal government’s stimulus funds went to consumers and businesses, while public companies benefited from the Federal Reserve’s quantitative easing. All that money did the trick, and the market bounced back.
Less than two months after wiping out nearly four years of stock market gains, the market was close to all-time highs by June. The sentiment in April and May was that while COVID-19 was a temporary setback, the fundamentals of the economy were strong. The idea was that pent up demand would make up for lost time. It was the fastest drop, followed by the fastest comeback, in stock market history.
It does not look like the trend will continue in June.
Shutdown Shivers and the Biden Bomb
“We’ve learned that if you shut down the economy, you’re gonna create more damage — medical problems that get put on hold,” Treasury Secretary Steven Mnuchin said. “We can’t shut down the economy again.” — > from @SalehaMohsin @business https://t.co/aUPj8kh6Gv via @bpolitics
— Mike Shepard (@MikeShepard4) June 11, 2020
A reopening economy and two weeks of cities packed with protesters have brought the reality of coronavirus back to the forefront. As the pandemic rears its ugly head, likely heading for a second peak, investors are worried about another shutdown. If the economy remains open, the chance of a full recovery is much higher than months of reduced economic activity.
Commenting on this fear, Treasury Secretary Steven Mnuchin said,
“We can’t shut down the economy again. I think we’ve learned that if you shut down the economy, you’re going to create more damage, and not just economic damage, but there are other areas.”
There’s another blip on Wall Street’s Radar: the prospect of a President Joe Biden.
Perhaps no other president would have seen the stock market near all-time highs during an economy-stalling pandemic. Simply put, Donald Trump is one of the most business-friendly presidents ever. From heavy tax cuts to deregulation to favoring domestic industry, Mr. Trump has done everything possible to keep the economy growing at maximum speed, even if it means ruffling a few feathers.
Joe Biden does not share that priority. If president, he plans to reverse the corporate tax cuts of the Trump Administration to their previous level of 35%, one of the highest levels in the world. Coupled with the economic pain of the pandemic, this could spell serious damage for the stock market and larger economy. If Donald gave business Trump Bump, Joe would drop the Biden Bomb.
For many Americans, this six-point drop in the stock market hurt. The hard truth is that it likely has a lot farther to fall, especially if Mr. Biden wins in November. Americans should plan their portfolios accordingly – volatility is the one thing you can count on in 2020.