HAMISH MCRAE: Silly to predict a Kamala economic crash

The panic is over but on past form there will be big bumps ahead though the rest of this year, bumps that could transform the election in November.

US equities have recovered most or all of the ground they lost in the chaotic days at the start of this month, and the S&P 500 index is near its all-time high in July.

Whenever there is a correction, a fall of 10 per cent or more, the market generally dips down again a couple of times to test the bottom of the dip. And sometimes, less often, it heads down into a bear market, a 20 per cent fall.

While this classification of corrections and bear markets is arbitrary, it is a useful shorthand for characterising downturns.

As you might imagine, people here are crawling over what happened in previous cycles, trying to calculate the odds for what might happen next. The dips after a correction are straightforward enough. There is nearly always a second decline, often a third, but rarely a fourth. That’s why it is easy to predict a bumpy couple of months ahead.

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

The 2020 one, triggered by the exceptional circumstances of the pandemic, was mild as prices fell for only a month and had fully recovered six months later.

After the 2007 collapse, associated with the banking crash the following year, it took more than four years for shares to get back to the previous peak. So what are the chances of the present uncertainties developing into a bear market? The closer parallels to the current situation are 1990, 2000 and 2022.

The first of those was the result of a classic recession, that of the early 1990s, which swept across the developed world. The second was a response to the exuberance of the dot-com boom. You can see the danger of recession now, and it was rising fears that the US might face one that led to the mayhem two weeks ago.

Those fears have now receded but could return. The boom in the Magnificent Seven high-tech enterprises superficially resembles the dot-com experience, and while the valuations are less extreme, there is a lot of hope embedded in those share prices.

And what of the 2022 cycle, associated with the invasion of Ukraine, the surge of inflation and the corresponding rise in interest rates? If it turns out that inflation is truly beaten and interest rates fall over the next couple of years, that’s fine. But it is hard to feel totally comfortable.

Writing from Washington, it is impossible not to be aware of the political implications of all this. Donald Trump has branded the market declines of two weeks ago the Kamala Crash, and on Thursday warned there would be 1929-style collapse were she to win the White House. It is silly, of course, as at the moment what is happening on the stock market has nothing to do with the election.

In any case, share prices have performed somewhat better under Democrat presidents, best of all under Bill Clinton.

But if this turns out to be a tight election, then it is plausible that what happens in the markets in the coming weeks could tip it.

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

The other question is whether Harris understands the concerns of business and can sell what will be a higher-tax programme, with increased worker protection, as something that will ultimately create a stronger economy.

The message of the markets through this strange summer has been that the economy is strong enough to cope with whoever wins the White House. I am not predicting a Kamala Crash, or indeed a Donald one, but I do expect confidence to be become frayed in the weeks ahead.