Wednesday's Stock Rout May Be Just The Beginning As Politics Overwhelms Markets

Wednesday's massive stock beatdown was not without warning. Stocks had been trending lower since the beginning of September, when all of the indices made new highs, for the NASDAQ and S&P these were all-time highs.

After significant drops in September, markets stabilized and made gains from late in the month through October 12. After that, it was all downhill. For the past eleven sessions stocks had been trending lower, the losses accelerating over time. The media's incessant focus on the failure of congress to pass a stimulus bill surely had impact on trader sentiment, but chartists saw a clear double top had formed and lower lows and lower highs were obvious danger signs.

Now in the midst of third quarter earnings season, reports aren't doing much to inspire investor confidence. In fact, the first batch of reports - from the nation's major banks - were met with elevated levels of skepticism, as the largest issuers of consumer debt - credit cards, mortgages, personal loans - such as Bank of America, Citi, Wells Fargo, and JP Morgan Chase massively under-reserved for credit losses, a policy endorsed by the Federal Reserve and codified into the first coronavirus stimulus bill, the CARES Act. (Money Daily will have a more in depth look at the accounting trickery banks employed to boost their third quarter earnings in Sunday's WEEKEND WRAP.)

What stood out to investors and interested onlookers of the banking industry was the overwhelmingly negative response. Instead of seeing their stock prices boosted by what were, for some, blowout earnings reports, bank stocks were among the weakest trades in the immediate aftermath of their reporting. Astute money managers were simply not buying the story the banks were peddling.

Beyond some disappointment in the earnings space and the slapstick stylings of congress and the administration in the failed negotiations over stimulus - which had persisted since late July - presidential politics and mainstream media's constant, over-the-top bias also added a degree of uncertainty to the mood of the market. A narrative that a Democratic sweep, a "blue wave" theory, had made the rounds in recent weeks, and that somehow, socialist, free-spending policies of a president Biden and a left-leaning senate and house, would usher in an era of utopian prosperity.

Hard-core capitalist economists and seasoned political pundits dismissed such a scenario as pipe-dreaming even as polling numbers - largely reporting that Biden and some Democrat senate candidates had built large leads - were being questioned and President Trump was drawing his usual overflow crowds at rallies in swing states.

When bombshell reports on the exploits of Hunter Biden, Joe Biden's son, began to emerge via the New York Post and Rudy Giuliani, suggesting that serious improprieties by the candidate had been committed while he was Vice President under Obama, involving not just dealings in Ukraine, but also in Russia and China, the blue wave theory began to unravel. When, on Tuesday evening, Tucker Carlson devoted his entire show to a Biden business partner by the name of Tony Bobulinski and more damning revelations, it became clear that Biden's campaign was in serious trouble. Making matters worse were the outright bans on referencing these allegations and news stories on Twitter and Facebook and complete silence from TV networks and major newspapers such as the New York Times and Washington Post.

The media made the choice to ignore a story that should have been front-page, special report material, instead focusing more on President Trump's flaws and policies with which the media disagreed and consequently disparaged, endlessly.

Politics doesn't often influence stocks, but in this case, it was the tipping point. Beyond a weakened economy with dim prospects to escape from a deep recession, the Biden revelations and media reaction was beyond the pale, shaking confidence in government and the revered fourth estate. The confluence of economic forces, overvaluation (if anyone can even decode what "value" means in today's markets), and frightening political prospects culminated in a colossal spasm of lost confidence and global retching.

Despite the suddenness of the selloff, stocks still have not even fallen beyond the levels seen in late September, so more of the same is to be expected. It's not out of the question that by the end of next week regardless of political winners and losers, stocks could be another five to eight percent lower than current levels.

Already, stocks are close to correction levels. The Dow, S&P 500 and NASDAQ are uniformly down nearly nine percent from September 2nd's highs. All are trading well below their 50-day and close to their 200-day moving averages. The next step lower will confirm a correction and the follow-up should result in resumption of the bear case, regardless of Fed jawboning, bond-buying, and special dispensations to distressed publicly-traded companies.

There's simply nothing to inspire a positive attitude. Dip-buyers, those who haven't already been reamed by the recent movement, are heading for slaughter. Put-call ratios are elevated, as is the VIX, to say nothing of the inner seething of the general populace. People will put up with a lot, but there is hardly an individual who can stomach liars and cheaters. All together, the mood is ugly and about to devolve into complete disarray and that's not good for anything, especially your investments.

At the Close, Wednesday, October 28, 2020:
Dow: 26,519.95, -943.24 (-3.43%)
NASDAQ: 11,004.87, -426.48 (-3.73%)
S&P 500: 3,271.03, -119.65 (-3.53%)
NYSE: 12,415.42, -402.45 (-3.14%)