This week in Bidenomics: the bear market president

President Biden talks a lot about inflation. He usually takes two turns. One, he recognizes that it is a serious problem for ordinary families. Two, he explains what he’s trying to do about it.

Biden hardly ever talks about the stock market, but maybe he should also start acknowledging the pain he’s causing. The S&P 500 Index fell 24% from its peak at the start of the year. The high-tech NASDAQ is down a punishing 33% from last November’s peak. Stocks rise and fall as a matter of course and usually don’t deserve presidential attention. But this bear market, which worsened in September, could throw a new layer of darkness on already gloomy Americans.

The driving force behind the 2022 market crash is inflation and the Federal Reserve’s belated but urgent effort to raise interest rates and reduce inflation. Rate hikes make lending more costly, which tends to cut spending and slow growth. Higher financial charges also reduce corporate profits, which is a factor that pushes shares lower. Investors are also grappling with how much collateral damage the Fed could cause as rates hike and the possibility of a recession hitting profits even harder.

A bear market in stocks doesn’t affect consumer confidence as much as inflation itself, especially the surge in gas prices that shocked drivers over the summer. Confidence bottomed out as gas prices peaked, so it started to recover as gas prices fell. But confidence turned to the downside in mid-September, according to Morning Consult’s daily monitoring survey. This coincided with a bad market sell that pushed the S&P to its lowest level in nearly two years. Biden’s approval rate had improved from 38% in July to 43% in early September, but is now falling again, along with the shares.

The stock market was a breeze for Biden during his first year in office. At the end of last year, the stock market performance under Biden was second best of any president dating back to Jimmy Carter in the 1970s. The market did better under Barack Obama, but only because the massive selloff caused by the 2008 financial crash ended two months after Obama’s first term, with the start of an epic rally. The market under Biden has now dropped from second to sixth, as this chart shows:

When asked about stocks, Biden typically says the stock market isn’t the real economy, so he rattles off some better stats on job growth or the legislation he’s signed. He is right and wrong. It is true that the direction of the shares does not directly affect the salaries of most people. People with investment or retirement accounts don’t lose money just because the value of the shares goes down. They only lose money if they sell low and block the declines. Many conservative investors can simply expect a bear market, as stocks are normally a long-term investment.

But the stock market reflects what is happening in the real economy, and a bear market often portends a recession. When stocks fall substantially, investors usually bet on a decline in corporate profits and future cash flows. Some economists think the US economy is headed for a recession within the next year and the bear market for equities could be a sign of arrival.

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When stocks go low enough, there is also a negative “wealth effect” that makes people with an investment or retirement portfolio feel poorer and sometimes holds back spending. This could happen now, as consumer spending is cooling. This also affects the economy, as consumer spending accounts for about two thirds of all economic output.

It’s not necessarily Biden’s fault

Did Biden Cause the 2022 Bear Market? Generally, no. He supported and signed the Democrats’ 2021 stimulus bill, which likely contributed a little to inflation, currently underway at 8.3%. But the biggest causes of inflation have been the shortage of goods created by the COVID pandemic and an extremely tight labor market that is making labor more expensive. Russia’s barbaric war in Ukraine is another factor, as it is pushing global energy costs higher.

It can be argued that the Federal Reserve should have seen this all come and start raising rates sooner. But Biden does not control the Fed and has expressly promised not to force the central bank to do this or that, as his predecessor Donald Trump did.

Trump also tried to speak to the stock market when it was plunging at the start of the COVID pandemic in February 2020. It didn’t work. Equities rebounded in April of that year when the Fed launched an extraordinary series of liquidity programs and rate cuts designed to help financial markets recover. Those measures worked. Maybe too good. The Fed has now reversed that easy money policy and to some extent is claiming gains in risk assets that may have gone too far.

Biden and his Democratic colleagues have had solid momentum since mid-summer, thanks to plunging gasoline prices and a string of legislative victories for Biden. For a fleeting moment, it seemed they might be able to defy the customary political backlash that costs the president’s party seats in midterm elections and retain control of Congress. For that to happen, however, Biden’s approval rate likely has to be close to 50%, and it simply won’t get there with financial markets issuing regular warnings that the Fed could foment a recession. Perhaps the markets will stabilize by the next round of elections, in 2024.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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