HAMISH MCRAE: Stupid to predict economic crash in Kamala

The panic is over, but given the previous results, there will still be major obstacles for the rest of the year. These obstacles could well affect the November elections.

US stocks have regained much if not all of the ground they lost in the chaotic days of early this month, with the S&P 500 index near its all-time high in July.

When there is a correction, a drop of 10 percent or more, the market usually drops a few more times to test the bottom of the dip. And sometimes, less often, it turns into a bear market, a drop of 20 percent.

While this division of corrections and bear markets is arbitrary, it is a useful way to characterize downturns.

As you can imagine, people here are fawning over what happened in previous cycles, and trying to calculate the odds of what might happen next. The declines after a correction are easy enough. There is almost always a second decline, often a third, but rarely a fourth. So it is easy to predict a few bumpy months ahead.

Bear markets are rarer beasts. There have been 11 since 1956, with the last five beginning in 1990, 2000, 2007, 2020 and 2022, when the S&P 500 fell 20 percent, 49 percent, 57 percent (ouch), 34 percent and 25 percent, respectively.

The 2020 price drop, caused by the exceptional circumstances of the pandemic, was mild: prices fell for only one month and fully recovered six months later.

After the 2007 collapse, which was accompanied by the banking crisis the following year, it took more than four years for stocks to return to their previous highs. So what are the chances that the current uncertainties will develop into a bear market? The closest parallels to the current situation are 1990, 2000 and 2022.

The first of these was the result of a classic recession, the one that swept the developed world in the early 1990s. The second was a reaction to the exuberance of the dotcom boom. You can see the danger of a recession now, and it was the growing fears that the US might be in for one that led to the chaos two weeks ago.

Those fears are gone now, but they could return. The boom in the Magnificent Seven high-tech companies looks superficially like the dotcom experience, and while the valuations are less extreme, there is a lot of hope in those stock prices.

And what about the 2022 cycle, which involves the invasion of Ukraine, the rise in inflation and the corresponding rise in interest rates? If it turns out that inflation really is defeated and interest rates fall in the coming years, that’s fine. But it’s hard to feel completely comfortable.

Writing from Washington, it’s impossible not to be aware of the political implications of all this. Donald Trump has called the market declines of two weeks ago the Kamala Crash, and warned on Thursday that a 1929-style collapse would occur if she won the White House. This is nonsense, of course, because what’s happening in the stock market right now has nothing to do with the election.

Regardless, stock prices performed somewhat better under Democratic presidents, and best under Bill Clinton.

But if the elections are going to be close, it is likely that developments on the markets in the coming weeks could be decisive.

There are two big questions. One is whether Trump is really seen as a pro-business candidate. Leave aside the support for Elon Musk, who despite his status as the richest person in the US, represents himself rather than corporate America. Look wider and there is ambivalence.

The other question is whether Harris understands the concerns of the business community and whether he can sell the program of higher taxes and better protections for workers as something that will ultimately lead to a stronger economy.

The message from the markets during this strange summer is that the economy is strong enough to take on whoever wins the White House. I’m not predicting a Kamala Crash, or even a Donald Crash, but I do expect confidence to decline in the coming weeks.