Why Markets Might Plunge in December and How You Can Profit From it

Why Markets Might Plunge in December and How You Can Profit From it

Posted On November 25, 2020 11:50 am

I think we can all agree it’s been a great November for investors.

After several weeks of worries about the election, surging COVID-19 cases, and worries about a double-dip recession, great vaccine news has sent the S&P 500 up 6% in just a few weeks. The Dow, which has companies with more pandemic exposure, is up an even more impressive 7.4%.

But of course, we know just how fickle Mr. Market can be in the short-term.

(Source: Michael Batnick)

There is no end of short-term risks that the market occasionally freaks out over, creating great long-term opportunities for prudent investors who are prepared to keep their heads when others are losing theirs.

Today I wanted to share a risk that many investors might not be aware of, but that is barreling towards us like a freight train. This risk has a definitive timeline, December 12th, 2020.

While there is a good chance that nothing may come of this risk if politicians in DC mess up (which is hardly a rare occurrence these days) the overvalued stock market may be in for a sharp, short and painful plunge.

One that smart investors can use to earn a fortune in 2021 and beyond.

Why The Government Might Shut Down On December 12th

In just the last few years we’ve had three government shutdowns, and over the decades we’ve had 22 of them.

(2018-2019 shutdown not shown)

The last potential shutdown was averted in September with another continuing resolution that expires on December 11th. At which point, on December 12th, unless a new resolution is passed by the House, Senate, and signed by the President, the government will shut down for the fourth time in four years.

Now, of course, most of the time the market shrugs off shutdowns, and the average shutdown decline is just a 0.4% decline. Half the time stocks actually go up. But nothing about 2020 has been normal, and this time may indeed be different.

We’ve Never Had A Shutdown In A Pandemic

The pandemic continues to rage uncontrolled in every state except Hawaii.

(Source: covidexitstrategy)

State after state is imposing steadily stricter limitations on businesses. While they are nothing like the sweeping and draconian lockdowns of April, the toll is starting to be felt in the American labor force.

(Source: Jeff Miller)

Last week we saw the first increase in new state unemployment claims in five weeks.

Small businesses, who create and maintain 50% to 60% of all US jobs, have been suffering for weeks with steadily falling revenue, that’s currently 31.3% below pre-pandemic levels.

A shutdown would not affect most of the military, but about 2.1 million Federal workers are at risk from a shutdown.

  • in the 2018-2019 shutdown, the longest in history, 380,000 workers were furloughed
  • 420,000 were told to keep working, without pay

The good news is that as soon as the shutdown ends all these workers will go back to work, and get backpay. In other words, there is limited direct damage to them.

The bad news? Contractors don’t get back pay for income lost during shutdowns. Similarly, small businesses who rely on Federal workers and contracts spending with them will never recoup the losses that always occur during shutdowns.

In normal economic times, small businesses have a chance to build up a safety buffer for such unexpected short-term blackswans. These are not normal times.

  • according to the Census Bureau’s weekly Pulse small business survey, 4.8% of small businesses say they plan to close forever within six months.
  • that’s approximately 1.5 million small businesses

Small businesses in America are stretched to the breaking point by this pandemic. A pandemic that the Institute for Health Metrics and evaluation expects to get steadily worse for the next three weeks.

The surge in cases has already had a noticeable effect on retail mobility in recent weeks.

                    Google Mobility Summary

(Source: Google Mobility) data as of the week ending November 17th

  • this week retail mobility: -20%
  • last week: -18% retail mobility
  • two weeks ago: -11% retail mobility

Consumer spending has always started to decline in recent weeks, and there is another important political deadline looming large over us.

  • December 26th the Federal 13-week unemployment extension expires
  • 12 million Americans, if nothing is done, will instantly see their income fall to zero

Imagine a perfect storm of negative economic shocks.

  • the pandemic peaks in mid-December with over 200K daily cases
  • US deaths continue rising (IHME estimates a peak of 2,500 in early January)
  • states continue to steadily impose small business revenue sapping restrictions in a desperate attempt to flatten the curve

Amid all pandemic chaos now throw in a government shutdown.

  • in which 800,000 workers might instantly see their income drop to zero
  • federal contactors would be affected by the hundreds of thousands as well

AND as if this one-two punch weren’t enough add to this 12 MILLION unemployed Americans facing the prospects of seeing their unemployment income drop to zero on December 26th, the day after Christmas of all dates.

The S&P 500 is currently 35% historically overvalued, literally priced for nothing ever going wrong again…ever.

Well, there are a lot of important things that could go wrong, all it takes is for politics to make a mistake, something they’ve been doing all year.

How The 2020 Election Could Be The Match That Lights The Shutdown Tinderbox

Mark Meadows, President Trump’s Chief of Staff, on November 18th said he can’t guarantee that another shutdown doesn’t happen. Right now President Trump is focused on the 2020 election, which he continues to insist he won but is being stolen from him via massive and nationwide voter fraud.

On December 14th the electoral college is meeting to vote for President, three days after the deadline to avert a potentially painful shutdown, an economic shock that is the last thing the economy needs right now.

Further contributing to this toxic stew of political uncertainty is the Georgia Senate runoff, occurring on January 5th, 2021.

  • right at the time, the US is expected to be facing the worst of the 3rd and final wave of the pandemic

Normally, a president who allows personal issues to stand in the way of signing critical legislation that is in the best interest of the country would face a strong pushback from senior party leaders. However, in this case, senior GOP officials are walking on eggshells around Trump because they know that the fate of who controls the Senate will be decided in just a few weeks.

  • Trump’s base remains as loyal to him as ever
  • the President has become increasingly volatile in recent weeks, due to the election outcome, lashing out at former allies and declaring them enemies

So we potentially face a perfect storm of negative factors, that could create the unthinkable, shutting down the government and throwing stripping millions of Americans of income right before the biggest fiscal cliff of all needs to be addressed, 12 million unemployed Americans being thrown under the bus on December 26th.

The time frames we’re dealing with are incredibly short by DC standards, where, with the exception of March 2020, nothing big ever gets done fast.

We’re not talking months to work through some complex issues, with huge potential negative ramifications for the economy, we’re talking three weeks.

With the ultimate economic shock of all, coming just two weeks after that.

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About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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