Stocks

Stocks Are Falling For 2 Reasons, But The End Is In Sight

Close up of the Wall Street sign with the American flag in the background
Credit: Carlo Allegri - Reuters / stock.adobe.com

There really are very few things more annoying than somebody who, when you are taking a hit on something, mutters "I told you so." I don’t want to be that guy; however, as I write this, the Dow is indicating an opening over 600 points below yesterday’s close, in the wake of down days on both Monday and Tuesday, I feel compelled to say "I told you so."

The thing is, there are two obvious reasons for the weakness, and both were foreseeable. At this point, of course, that is as good as irrelevant to investors. What matters is whether or not there are more losses to come, and if so, what they should do about it.

ES futures chart

Unfortunately, the answer to the first of those questions seems to be "yes."

As I said, there are two main reasons for the drop in stocks, and neither of them are going away, at least not for a week or so. The first is that the market is obviously disappointed by the lack of a stimulus bill from Congress. They really shouldn’t be surprised, though. As I pointed out last week, all the optimistic talk about an agreement on a stimulus package was destined to be just that. It simply came up against the political reality that neither side wanted to give the appearance of a win for the other side with an election on the horizon.

The second reason stocks are falling is also election related, but more directly. I have pointed out a few times recently that even though the numbers clearly indicate that the market has performed better with Democrats in the White House than Republicans since the Second World War, the prospect of a Democratic win usually prompts selling. You could argue that that is perfectly logical given the Democrats tend to be less pro-business, or that it is just the result of the political bias of the very rich who control most of the money, but either way, it tends to happen.

So, with Joe Biden holding a lead in national polling averages and in the majority of swing states, weakness in the market is not at all surprising.

The good news is that if those are the factors prompting the selloff this week, they will fade quickly exactly a week from now, when the election is, to everyone’s relief, over. That said, I would be remiss if I didn't note that there is a chance that the election won't be neatly resolved by this time next week, a possibility that I covered here, but for now, let’s take the positive view and assume it will.

There will still be the issue of a resurgent Covid-19 but that was the case when the market was flying too. There has always been the assumption that this disruption will be temporary and, if that is true, then the longer we go and the closer we get to effective vaccines and treatments, the less of a concern that is.

That leaves us with a market that is falling for political reasons. Once the election is done, if Biden does win, the declines may continue for a while but it is quite likely that the stimulus issue will come to the rescue. Lame duck presidents and congresses are notoriously ineffective but, in this case, with the political advantage of inaction gone, there will be no reason, other than maybe pure spite, to not do what is needed.

Meanwhile, in the background, we will still have the Fed handing trillions of investable dollars to banks and financial institutions and American businesses that are showing their usual resilience and adaptability. This earnings season so far has been mainly positive with a distinct “nowhere near as we feared” feel to it. There is still the matter of massive unemployment that could be quite sticky and the chance of another wave of restrictions on business and consumer activity in response to the pandemic but, as I said, that was already the case when stocks surged to new highs.

As to what you should do about it, in the short-term it may pay to take out some “insurance” on your portfolio, by buying something like SDOW, the ProShares 3x leveraged inverse Dow tracker that goes up when the Dow falls, for example. That way, if the declines continue as expected, you will not only offset losses but also make it less likely that you will panic into selling everything just before the bounce comes. It may also pay to get out of -- or at least trim -- the riskier, more volatile stocks that you own, and keep the cash with a view to re-entering those positions after the election is over.

I am sure we are all looking forward to that time when TV ads promote products instead of people, and we don’t pass judgement on our neighbors based on their lawn signs. Investors should be especially eager for election season to be over though, because once it is, the two biggest things driving stocks lower -- the anticipation of a Democratic win and the roadblock in the way of needed stimulus -- will be over with it and the market will have a chance to recover.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

Read Martin's Bio