An unprecedented stock market crash is right at the corner. In face of mounting uncertainty surrounding the coming elections, new BofA data suggests that a 20% market plunge will be seen in a couple of days. The prospect of a contested outcome might crush investors expectations and finally trigger the ultimate downfall. In this video, we discuss this perfect storm investors have been long fearing.
This year, the global health crisis has prompted the benchmark S&P 500 to shrunk 34% in a matter of just 33 days. And then, stock markets experienced the fastest snap-back rally to new highs from a bear market low on record. According to history, a stock market crash or correction was already highly expected.
Doomsday predictions for the stock market have been piling up, and volatility is just one of the factors of influence for the coming crash. Domestic equity funds are also riding a 19-week streak of ongoing outflows that are happening just when U.S. Treasury yields are on record-lows. Investors seeking guaranteed income have been coping with only a 0.8% yield on the 10-year Treasury note.
That’s to say, Treasury bondholders are going to lose loads of money if they decide to keep holding on to these bonds until maturity. And this is just the beginning. The possibility of another round of lockdown restrictions both within and outside the United States has been scaring investors who desperately need business activity to resume since the increasing delinquency rates for mortgages, rent, credit cards, and personal loans that are likely to skyrocket in the coming months.
The elections’ uncertainty can also swiftly become a major problem. Wall Street doesn’t care about who will be named as a winner, but the lack of a clear result that could create a contested election causing the markets to rattle.
The biggest concern for investors is reviving the 2000 election scenario of Al Gore vs. George W. Bush, which lingered for 34 days after the vote counting and required Supreme Court intervention to decide who was the winner.
In the case of a close election, it will take time to count and invariably re-count all the absentee and mail-in ballots, which would be the worst-case scenario for the market, jeopardizing the market performance into the year-end, especially because the economy is in desperate need of another round of stimulus relief.
The most urgent worry now is that a delay in the settlement of a new president would also imply a delay in delivering more much-needed federal assistance. In the absence of a clear winner, it will become even harder to advance stimulus legislation through Congress during the weeks after the election. That would coincide with the holiday season, and consequently, undermine the projected upswing in consumer spending and put the holiday spending season at risk.
Stocks are expected to drop in all sectors since investors aren’t accounting for that. Their anguish surrounding the issuance of a new stimulus bill also exposes how markets have become too dependent on government open-handedness, but there’s only so much that governments can do. A cobra effect is being formed on the markets and so much unbacked stimulus will cause a hyperinflationary economic collapse, which means the next stock market crash will merely be one more chapter of this multi-faced economic collapse, but hardly the end-line.