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The Next Big Risk to the Bull Market



Figure of a Bull with Quote and Charts | The Next Big Risk to the Bull Market | Featured

The stock market has managed to stay largely unharmed by the economic effects of the pandemic. Will this continue through 2020? One major risk factor looms in 2020, and it has nothing to do with the pandemic.

The Market Keeps Chugging

June was a fairly uneventful month for the US stock market, ending up 1% higher. It has been the third straight month of stock market gains after getting routed in March. Why has the market been so resilient in such gloomy times?

Perhaps at no other time in the history of the stock market has it been so disconnected from the larger economy. The unemployment rate is over 10%. Businesses have closed across the country. Several US airlines have warned that they need to cut thousands of flight attendant jobs. The reason the stock market doesn’t care about this has to do with two things: interest rates and optimism.

Interest Rates and Optimism

When it comes to stocks, today is important, but the market gets its value largely from expectations about the future. In the past, economic downturns have immediately made for a gloomy future outlook. This time, since the downturn is due to the coronavirus pandemic, investors seem to assume that once that’s resolved, the economy will return to business as usual. Not only will people snap back into action, but they’ll have a lot of pent-up demand after staying home for so long.

This is called a V-shaped recovery, which happens when the economy dips and shoots right back up. Whether that will happen is debatable, but many analysts are hopeful that it will.

The second reason, just as important as the first, is that the government is doing everything it can to keep the economy afloat. It’s injected trillions into the economy already, from boosting unemployment to lending money to businesses to sending Americans direct checks. The biggest impact on Wall Street, however, has come from low interest rates. The government has set interest rates so low that borrowing money is nearly free to commercial banks. These banks also aren’t getting any return on their savings. These two factors make the stock market a much more attractive place to put their money.

While optimism and government intervention have managed to keep the market afloat so far, one major event could still derail it before the year ends.

Biggest Risk to the Bull Market: Joe Biden

One of the greatest risks to a resilient stock market is the election of Joe Biden. Analysts are sounding the alarm on what has, until recently, received little attention.

Christopher Harvey, head of Equity Strategy at Wells Fargo, said that if Biden wins, Wall Street could feel the pain immediately.
“Biden is moving up in the polls,” he told CNBC. “What does that mean for taxes? Can they [the Democrats] win? Not just in the White House, but can they win the Senate, as well?”

Harvey’s suspicions are warranted. Biden recently told donors that, if elected, one of his first objectives would be to reverse Donald Trump’s tax cuts. Business-friendly regulation would likely be next on the docket.

Though Harvey was cautious about future performance, he still foresees the market moving further up in 2020, perhaps hinting that he expects a win for President Trump. While poll numbers have not been in the president’s favor lately, much can change between now and November. If the Democrats take control of Congress and the White House, however, a big dip in the markets is a near-certainty.

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