The disparity between rising nationwide virus cases and a rising stock market finally took its toll on investors this week. While damage was sustained to the averages, it was far from a bloodbath. A few more days of the same back and fill would not be a surprise.
Stocks lost ground under the sheer weight of skyrocketing infections throughout those states that have heeded Donald Trump's directions to ignore medical advice and re-open their economies. Valuing election victory over lives has cost us all a great deal and it is not over. I expect that without a national policy, or strategy to guide us, today's regional "hot spots" will migrate. Carriers from one state, city, or town will spread the virus to others in a succession of infections that will prolong the pandemic and deaths.
As a result, we should also expect to see the economic data in the weeks ahead begin to reflect the case counts we are reading today. If so, you might be anticipating that the stock market will sell off, maybe even re-test the March lows. If you sold in a panic back when, (as many did) and missed the 53 percent move higher in the S&P 500 Index since then, I suspect that is what you are hoping for. Don't hold your breath.
Here is what you are missing. The stock market is not marching to the tune of the COVID-19 Top Thirty. Sure, on a day-to-day headline basis, markets could move up or down (like they did this week) as the case count worsens, or a new vaccine possibility is announced. But the stock market gains amassed thus far have been the work of monetary and fiscal stimulus.
The worse the infective fires get — the cases, the deaths, the weakening data — the more stimulus the government will pour on the flames. A new stimulus package, which may now be expected to total $1 trillion, could easily double, or triple, if things get out of hand. If stocks drop too fast, or too far, I fully expect the Federal Reserve Bank and the U.S. Treasury to step in and support the stock markets, as they are doing now in the bond markets.
Armageddon can only occur if no one does anything. In an election year that won't happen, in my opinion. Speaking of elections, Joe Biden launched his own version of Donald Trump's America First program. Biden's U.S.-centered plan would see government spend $700 billion in American-made materials and products over four years. Another $300 billion would go to U.S.-based research and development involving electric cars, artificial intelligence, and other cutting-edge technologies.
While he also promised to raise the corporate tax to 28 percent, Wall Street and big business were expecting that anyway, given that the Trump corporate tax cuts of 2018 did not produce the desired results. Overall, investors seemed to take on board that a Biden victory, while possibly disruptive to further gains in the stock market, would not necessarily spell the end of business, nor usher in an era of socialism/communism as the president would have us believe.
Earnings season begins next week with the money-center banks reporting in mid-week. While results are backward-looking, and therefore already discounted by the markets, investors will be listening for guidance from the CEOs and CFOs as to whether the economy is beginning to roll over again (the bear's case), or that the economy is still gaining momentum. Either way, expect volatility.
As for where I see the markets going, my bet is that we could see the S&P 500 Index tack on another 100 points before the end of July. At that point, let's reassess.
Bill Schmick is now the 'Retired Investor.' After working in the financial services business for more than 40 years, Bill is paring back and focusing exclusively on writing about the financial markets, the needs of retired investors like himself, and how to make your last 30 years of your life your absolute best. You can reach him at firstname.lastname@example.org or leave a message at 413-347-2401.
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