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Stock market posts record loss a week before US election

Written by Leonardo Hadi · 2 min read >
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The market continues the major sell-off on Friday, influenced by the US presidential election next week, the rise of coronavirus cases, and the new stimulus bill’s delay.

New York Stock Exchange. Photo by Mitch Nielsen on Unsplash.

The Dow Jones Industrial Average (DJIA) drops 150 points, or 0.59%, closing at 26,501.06 at the end of the trading day. This marks the biggest weekly loss since the height of the Coronavirus pandemic in March.

The S&P 500, the fund index that tracks the top 500 companies listed in the US stock market, slips 40.15 points, or 1.2%, closing at 3,269.96.

Nasdaq 100, an index that monitors the top 100 technology companies, drops 157 points, or 1.4%, to 11,108.8 despite strong earnings from Apple, Google, Facebook, Microsoft, and Amazon.

S&P 500 Volatility Index  increases prior to next week’s election
The S&P 500 Volatility Index Year-to-Date. The volatility index is negatively correlated with the stock market. The stock market will go up when the volatility index goes down, and vice versa. Source: https://www.hivelr.com/market-data/

The volatility index jumps as the market braces for the US election next week. Next week, the trading session will go through a choppy ride as investors are anxious about the US election result.

Trump is consistent with Republican policies of tax cuts, deregulation, increased military spending, roll back on health care, anti-climate change, and illegal immigration [1].

Trump is known for his protectionism policies that disrupt globalization. Defense, aerospace, oil & gas, technology, financials,  healthcare, and anything but China are the sectors that will be benefited if Trump is elected for a second term [2].

On the other hand, Biden is pro-green energy, pro-climate change, anti-oil & gas, pro- minimum wage raises, pro-tax increase, pro-Obamacare, and pro-globalization [3]. Pharmaceutical, renewable energy, and cannabis will most likely perform better if Biden is elected [4].

Based on a BBC report, Biden is leading the national polls by 52% vs. Trump of 43% [5].

However, winning the most vote does not mean winning the election as the US uses an electoral college system. In 2016, Hillary Clinton won 3 million votes ahead of Donald Trump, but she still lost on the electoral votes [6].

Many believed four years ago that if Trump won, the market would go upside down. Yet, the unemployment hit a record low, inflation was relatively low, and the US economy was booming until the Coronavirus pandemic hit in the election year.

New Coronavirus cases hit an all-time high

The latest data from Johns Hopkins University shows global death due to the pandemic hit 1.18 million, and nearly 230,000 death come from the US. The Coronavirus center also reports more than 45 million cases globally, and more than 9 million people are infected in the US.

The new restriction is implemented in Canada, Germany, and France to limit the Coronavirus spread. Still, the new lockdown measures will delay the re-opening of the economy and trigger sharp losses in the stock market.

Based on the volatility index chart above, the stock market had a major boost between May to October, shown in the low and consistent volatility index.

The massive fiscal stimulus from the US administration and monetary policy intervention from the Federal Reserve to buy US Treasury Bond through Quantitative Easing had stabilized the stock market and prevent it from a meltdown.

However, two short-term volatility spikes in June and September were influenced by the fear of the second wave of the pandemic. But the volatility index hit another high, leading to the US election next week.

Investors are worried that the new economic restriction without another stimulus bill will cripple more businesses, create more job losses, and force more businesses to shut down.

Delay on the new stimulus bill

The US Senate delays the new stimulus bill talk until November 9, 2020. The chance to get both Democrat and Republication to reach the new stimulus agreement before the election is improbable. On his latest media appearance, President Trump commented that “we will have a tremendous stimulus package immediately after the election.”

The power split between Republicans who control the Senate and Democrat who runs the House makes it difficult to reach a bipartisan agreement over the stimulus. The economy desperately needs another stimulus facing the new restriction that prevents people from working and earn full income.

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Written by Leonardo Hadi
Quantitative hedge fund investor and Professional Engineer, holding an MBA from the University of Illinois at Urbana-Champaign Profile

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