On Monday, we saw stocks sell off drastically. The Dow was down more than 3% at one point, fortunately, it recovered it’s losses and closed at 2.3% at 27,685. We also saw the S&P 500 fall 1.9% to 3,400.
The cause? The U.S. hit a record high number of COVID-19 cases while the negotiations between Congress and the White House to reach a deal on a stimulus bill appears to be at a standstill. Uncertainty around the elections, a week away, is also a major drag.
A standstill with the stimulus bill
Tom Lee, head of research at Fundstrat Global Advisors stated, “We have a lot of things to be anxious about in the next couple of weeks. That’s why this is a pre-election market. But post-election, I think a lot of things that make people nervous turn into a tailwind.”
“Post-election stimulus is a when, not an if,” Lee stated, “Even if it’s a mixed Congress, I think there’s still some common ground. It’s just the scope that’s different. It would be a smaller package.”
Lee and a few other strategists are warning that this week may be a rocky one for the stock market.
Lockdowns across the world
SAP, the largest European software company by revenue, sent a chill down our spines when they stated that it’s business was being hurt by the lockdowns.
“Covid is suppressing the economy, and it’s essentially offsetting easy money. If we didn’t have Covid, people would be going out and spending money,” Tom Lee stated. “It’s acting as a huge headwind.”
A market possibly worried about Biden
Managing partner at Ironsides Macroeconomics, Barry Knapp, explained that concerns about a possible victory for Joe Biden may be reflected in the market.
Knapp stated, “For me the most important outcome of the election is: Does the corporate part of the tax cuts survive?” If not, Knapp said that we would likely see corporate earnings fall, corporate spending decline, and investment take a downturn.
Not only this, but at the top of Biden’s agenda is the reversal of Republican tax cuts. This reversal would raise taxes on corporations and wealthy individuals. He would also be expected to reach a deal on a stimulus bill, the size of which would be determined on whether or not the Senate is controlled by Democrats.
Multiple strategists exclaimed that if there is a clear winner after the election, the market should surge. However, if there is no clear winner, or the election is contested, we may see a period of continued turmoil in the stock market.
It’s important to keep in mind that, historically, the stock market is bullish between election day and the end of the year.