Believe it or not, there is a plausible scenario that foresees stock markets potentially retesting their lowest points of this wild year.
While not the base case, it’s not far-fetched to imagine the S&P 500 experiencing another 30-percent loss within the next three months. If that sounds bizarre, it is. But remember, this whole year has been bizarre.
Nobody knows the future, but there are three risk factors that will weigh large in the fate of markets.
First, we have the 2020 election, which carries an extraordinary amount of uncertainty. The race could be close. And there are questions around the losing party accepting the outcome. It’s not surprising investors are betting on election-related volatility.
Second, the lack of follow-through from Washington on additional pandemic stimulus relief is crushing the economy’s lifeblood. Due to a lack of agreement in Congress, the real economy – Main Street – is getting the rug pulled out from underneath its feet as already tough conditions worsen.
Finally, online trading platforms like Robinhood have created a bull market empowered by an army of green day traders pouring staggering amounts of money into call options. The funds that drove this phenomenon were powered by Uncle Sam, begging the question – what happens when the well runs dry?
It seems we’re setting up for a gruesome joint experiment.
What happens if you pull the funds that kept everything afloat? And what if that occurs as flu season collides with COVID-19?
Given how stock valuations are as extreme as they’ve been in a century, a collapse of bullish sentiment and a flood of sell orders with no accompanying buy orders could create a freefall towards March lows.
I’m not saying it’s going to happen. But anything is possible in 2020. This year is like a flock of black swans.