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Stock Market Tumbles as Stimulus Hopes Fade

October 15, 2020 By Mircea Vasiu

If there is one driver in financial markets these days, that is the stock market in the United States. The most developed stock market in the world, it reflects pure American capitalism.

Since the pandemic started, it was corrected in a vicious move that created the fastest bull/bear break in history. But then the authorities intervened.

One of the most effective “medicine” for an economy characterized by high unemployment is to expand both monetary and fiscal policy. The Fed and the U.S. Congress reacted quickly – and so did the stock market. It bounced back, ending the shortest bear market in history. Quite a recovery!

Stimulus Talks Ahead of U.S. Elections

If this were not an election year in the United States, things would have been different during the pandemic. Not necessarily regarding the Fed and Congress’ actions, but regarding the extent of the fiscal stimulus.

One of the most underrated speeches of a central banker was delivered last week. Fed’s Powell effectively mentioned that the Fed’s monetary policy tools are stretched at this point. In other words, there is not much to be done. However, if we look back in history, the Fed always has something up its sleeve.

Maybe this time, the Fed wanted to put pressure on the Congress to agree to a new fiscal package. If we consider that the next Fed meeting comes a couple of days after the U.S. elections, the Fed may just be in a wait and see mode.

Just like a sick patient, the stock market is dependent on the medicine it received to get better. So far, the stock market received stimulus from all parts involved. Now that the discussions around new stimulus fade, the stock market reacts by correcting from the highs.

A recent study shows that there are less than 20% chances for a new stimulus package to be released ahead of the U.S. elections. The main argument is that the speaker Pelosi will never agree on small deals that will only help President Trump at this point. Also, who would want to take responsibility for a deal ahead of the U.S. elections?

The problem we have here goes beyond the stock market performance. In the meantime, the pandemic affects lives – the unemployment rate continues to be elevated. With people in desperate need of dollars to make ends meet, any delay in fiscal stimulus has dire consequences for society.

It may be that the stock market will put politicians at try in the next two weeks. Let us not forget how quickly it can turn from bullish to bearish?