U.S. Stock Market Risks ‘Weeks’ of Stagnation After Roaring Rally

There are no bilateral talks scheduled in the immediate-term, pushing analysts to predict two weeks of stagnation in the stock market.

U.S. stocks took a tumble amid an ongoing impasse for a stimulus deal - but there may more bumps in the road ahead. | Source: REUTERS/Lucas Jackson/File Photo

  • The U.S. stock market faces weeks of stagnation after the stimulus deal was delayed.
  • Surging virus cases and the concerns of the second wave in Asia might cause global markets to slow down.
  • The prospect of Joe Biden’s election in November is a persistent variable in the equities market.

On Tuesday, Senate majority leader Mitch McConnell’s comments about the delayed stimulus deal led the U.S. stock market to pull back during the late trading hours. There are no talks scheduled in the immediate-term, pushing analysts to predict weeks of stagnation in the equities market.

The U.S. stock market declined by 0.38% on August 12. It prompted strategists to describe the setback of the stimulus as a catalyst for a big reversal.

Rodrigo Catril, National Australia Bank’s currency strategist, said:

“[The stalemate was the] catalyst for the big reversal in US equities in the last couple of hours of trading.”

The U.S. stock market slumped after Mitch McConnell confirmed delayed stimulus talks. | Source: Yahoo Finance

Weeks of Uncertainty and Consolidation in the Stock Market Expected

The postponed stimulus deal sets a negative precedent for two reasons.

First, it suggests that both Republican and Democratic parties would likely see intensified relations heading into the presidential election.

Second, it brings additional uncertainty into the stock market, which seemingly priced in an imminent stimulus deal.

Throughout the past week, U.S. Treasury yields dropped as stock market investors anticipated a multi-trillion dollar stimulus package.

In a follow-up note, Catril emphasized that the deadlock between the Republicans and Democrats could go on for weeks.

Video: Congress continues to sit over the latest stimulus deal

A significant delay in new stimulus could slow down the recovering economy of the U.S., which remains vulnerable.

Economists are concerned that the increase in virus infections would continuously impose pressure on the economy.

Consequently, IHS Markit’s chief economist Nariman Behravesh said “the U.S. won’t be the locomotive” to rescue the global economy.

Since the start of the week, other major economies have also started to slow down. Fears of the resurgence of the virus are spreading across Asia and Asia-Pacific.

China, which saw an increase in factory output and business productivity, saw its stock market slump since August 6.

New Zealand, which has not seen any local virus case for three months, also recorded four new cases. The country imposed restrictions in Auckland for three days.

Video: More Choppy Stock Market Expected in the Second Half of 2020

Analysts have attributed the slowdown in the U.S. economy and the stock market to the handling of the pandemic.

Behravesh emphasized that the rebound of the U.S. economy “would have been stronger” if the virus was handled better. He said:

There’s no doubt in my mind about that.

As countries that handled the pandemic efficiently early on see new cases, concerns about the second wave would likely emerge.

In the near-term, strategists fear that the U.S. economy and the stock market would decline as a result.

Presidential Election is Also a Variable

Investors are also anticipating the results of the November presidential election, which could be a persistent driving factor of stocks.

Some say that if Joe Biden takes the house, the U.S. stock market would continue to rally as it did throughout history.

Even with the threat of higher taxes and more regulations, data points suggest 15% annual returns in the stock market are possible.

Last modified: September 23, 2020 2:19 PM

Joseph Young: Financial analyst based in Seoul, South Korea. Contributing regularly to CCN and Forbes. I have covered the stock market and bitcoin since 2013. Reach him on Twitter or LinkedIn.