The Swooning Stock Market and the Election
Bloomberg Terminal. Photo by Gforsythe / CC0 via Wikimedia Commons
On Monday, the Dow fell more than 1,000 points to close 2.6 percent lower. The NASDAQ was down 3.43 percent. The selloff had several roots, none of which can be traced back to President Biden or Kamala Harris except by six degrees of separation. (Sorry, Republicans.)
The decline actually began in Japan where, as the Wall Street Journal explains, American investors were engaged in the carry trade with the yen. The carry trade essentially profits from differences in interest rates by borrowing money at low rates in places like Japan and China and reinvesting the proceeds in countries with higher rates. The rising yen in recent weeks forced investors to close out these positions by selling their high-interest investments to pay off their borrowed yen deals.
On this side of the pond, the panic was fueled by a disappointing jobs report last Friday and the news that Warren Buffett’s Berkshire Hathaway was cutting loose more than half of its holdings in Apple. Buffett’s thinking is not totally apparent, but the move was likely affected by slow growth from Apple, a high valuation for the stock, and a saturated electronics market. Apple ended the day down 4.82 percent.
The July jobs report, which came out Friday, showed unemployment at a three-year high of 4.3 percent. The rising unemployment rate boosts fears of a hard landing from the Fed’s inflation battle.
The flip side is that the higher unemployment boosts the chances that the Fed will start lowering interest rates again soon. There has been a strong correlation between interest rate hikes and bad days for the stock market. There was a lot of hope that the Fed would lower rates in July, but the current news makes a rate drop a sure thing in coming months. That may goose the market in turn and avoid the widely expected hard landing.
The instability in the stock market also adds instability to the election. A recent CBS/YouGov poll showed that voters trust Trump over Harris on the economy by 45 to 25 percent, but interestingly, the same poll showed Harris edging out Trump in the topline number. The disparity on the economy is likely due to Joe Biden’s ineffectiveness at pressing home attacks on Trump’s proposed tax increases and a poor record on the economy in his first term that included massive debt (larger than Biden’s) and unnecessary trade wars that strangled American manufacturing and agriculture. Kamala Harris is already proving more effective at building trust on the economy.
A stock market crash generally is not considered to be a great thing for the incumbent – and Harris is a quasi-incumbent – but it’s also true that the market has not crashed. At least not yet. The largest single-day decline in history came in 1987 when the market fell almost 22 percent in one day. The big question is where the market goes from here. The WSJ predicts more unwinding of the yen carry trade in coming days, but market fundamentals are still strong. Plus, the Dow is still up 2.6 percent for the year, even after Monday.
Still, a market that is at least perceived as moving into bear territory might not be good for Kamala Harris, as Donald Trump gleefully pointed out on Truth Social. Trump called the decline the “Kamala crash” and warned of a “GREAT DEPRESSION OF 2024, NOT TO MENTION THE PROBABILITY OF WORLD WAR III” if Harris is elected [emphasis his].
In unstable times, the stock market can be erratic. If anyone should know this, it’s Donald Trump because the stock market was a wild ride during his tenure. A lot of the blame for the erratic stock market during the Trump years can be tied to Donald Trump’s erratic trade policies as Kevin Simmons pointed out in the Dallas Morning News in 2019. Last week, several Yale faculty members penned a joint article that opined that Trump’s economic talk on the campaign trail was already rattling markets, especially as he led Joe Biden in the polls.
Nevertheless, I don’t blame Trump for Monday’s decline either. Even though political sites try to tie every bad event to the competition and every good event to their champion, the truth is that a lot of world events have nothing (or little) to do with American politics.
Natural disasters occur, accidents happen, and stock markets and economies go up and down. This doesn’t mean that there is always someone to blame. For decades now, we’ve known that the business cycle is a predictable trend. The economy can’t always grow, no matter who is president, and like forest fires enable ecosystems to become more vibrant, recessions can be necessary to prune economies of inefficient and weak businesses. In the current economy, a recession may be a necessary by-product of the fight against inflation as Ronald Reagan and Paul Volcker experienced in the early 1980s.
But even though politicians aren’t always at fault, they definitely get the blame. If the economy slows as we move toward Election Day, the question will be whether voters fear a recession more than they dislike Donald Trump.
