What will stop the stock market?

Just before the pandemic, I wrote a terribly timed article entitled “nothing stops the stock market.” Of course, stocks promptly took one of the steepest, deepest dives in history, and I had a good laugh at myself (while also crying a little). However, that article looks a lot better in hindsight. At the moment I’m writing this, the S&P 500 is up more than 10% in 2020. If a global pandemic and one of the worst recessions in history couldn’t keep the stock market down for more than a couple months, what will?  

While I do think the stock market is a little too enthusiastic, there are many reasons to be optimistic. News of highly effective vaccines is the most important reason for optimism, but the election brought good news for the stock market too. Under a divided government, gridlock is likely to reign. That means the Trump tax cuts won’t be reversed, and the big tech companies won’t be hassled. On the trade war front, while high tariffs with China are likely to remain, the trade war will be waged much less chaotically.

A favorite axiom of the financial world is the “the stock market hates uncertainty.” If that’s true, it explains the optimism in the markets. If there’s one thing we gained over the last month, it’s certainty. Of course, the news isn’t all good. The pandemic is growing, shutdowns are here again, and the economy is slowing. Further, we haven’t experienced lockdowns without the government shoveling trillions of dollars into the economy – which isn’t likely to be repeated anytime soon. So, the coming months might be hard. However, even if we fall into another steep recession, the stock market may ignore it because promising vaccines are merely months away.  

At this point, I’m not sure what can slow down the stock market. However, times like this are often when stocks surprise investors. In the same way that the best time to buy stocks is when there’s “blood in the water” (March 2009 for example), the best time to sell stocks is often when the water is calm and beautiful. That’s certainly not a recommendation to sell all your stocks and hide the money in your backyard. But investors should keep their guard up and not get complacent – especially when the future looks rosy.