In the runup to an election which will determine both the presidency and control of congress, the stock market has been almost oblivious to changing poll numbers and has stayed near its all-time highs, which were set AFTER the pandemic sprung from the bat cave. The Pollyanna explanation is that the stock market focuses on the long-term and the long-term prospects for the US economy are good no matter who the next President is or whether the Democrats control the Senate as well as the House.
The Pollyanna explanation is BS. There is almost nothing as short-term as the stock market. Ask the CEO of any public company (I was once one such), what happens when quarterly earnings are released, forecast, or hinted at. The mob of investors (and robot investors) who rush in or out are about as long-term oriented as my eleven-month old puppy at dinner time.
The market is reacting to the twists and turns of more stimulus. Today it was down quite a bit because Nancy Pelosi gave the White House a deadline of tomorrow for making a deal and nothing has happened yet. If the White House doesn’t cave, says Nancy, no deal until AFTER THE ELECTION. That’s three weeks away, too long-term for the stock market.
Demand created by printing money and shoveling it out the door is hardly long-term. The demand evaporates as soon as the stimulus stops. But the stock market has become addicted to the temporary high of the stimulus drug. The addiction actually began with the recession of 2008. Remember Obama’s close to one trillion-dollar stimulus (seemed big then) and the bailout of the banks, which was another sort of stimulus. Although the federal government didn’t start writing huge stimulus checks again until Covid hit, the Federal Reserve never took back the money which it had poured into the system and kept interest rates incredibly low.
The Federal Reserve is being even more generous now with its low or no interest lending – quite literally printing money. Notice that big bank earnings exceeded expectations in the last Covid-ridden quarter. The banks benefitted both from having almost free money from the Fed to lend to their biggest clients (not small businesses) and also from huge fees they received for helping the government shovel stimulus money out the door.
Back to the stock market: in order for it to keep going up, there needs to be more new money buying stocks than there is money leaving the market from selling. The money flows in and out of the market are more long-term than the daily stampedes – sort of like tides and waves. There has been a tidal flow of money into the market since 2008, thanks again to the Fed which has force-fed funds to the banks at the top of the economic pyramid. Most of this money doesn’t trickle down, it buys assets and creates bubbles. Housing and stock market bubbles are the easiest to inflate and we see them swelling around us. Moreover, when interest rates are low, savings accounts and bonds aren’t attractive, so anyone who has any spare cash is very tempted to put money into stocks.
Notice that none of the reasons I’ve given for the movements of the stock market have anything to do with what’s happening in the real economy. They have everything to do with what government including the Federal Reserve is doing. Lately the market seems to go up on bad numbers like a slowdown in the jobs recovery. Why? Easy. Bad numbers make it more likely that more stimulus drug will be administered.
But isn’t the market worried that Democrats will raise taxes and reduce rich people’s investable funds? Apparently not. Biden’s rise in the polls hasn’t hurt the market. Two reasons why, in my view: 1) Democrats will raise taxes but they’ll put even more money than what increased taxes net them into the economy as stimulus; 2) Biden Democrats aren’t any more serious than Donald Trump about increasing the amount that rich people pay.
If Biden were serious about raising taxes on the very rich, he’d be talking about closing loopholes, not raising rates. If loopholes reduce taxable income to zero, doesn’t matter what percentage of zero a taxpayer must pay. If Biden and Pelosi were serious about making the system more progressive, they wouldn’t be pledging to undo the most progressive part of the Trump tax cut: the low limit on federal deductibility of state and local taxes (SALT, it’s called), which hurts only the wealthy. Actually, AOC understands and is “right” on this issue; but she’s giving Biden a bye.
The stock market doesn’t care that we have an awful choice again to make in this election because it believes the fix is in and that stimulus, Fed largesse, and tax loopholes will remain under both Trump and Biden. The stock market doesn’t care that Trump’s lack of effective national action to help states deal with pandemic and leadership by bad example are crushing the economy or that Biden’s focus on continued subsidies, especially to anybody who paints him or herself green, will grow weeds where trees and factories ought to be. The stock market doesn’t care about the real economy. Until the music stops….
And that’s one more reason we should be very worried in this annus horribilus.
By Tom Evslin
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