President Biden talks a lot about inflation. He typically takes two tacks. One, he acknowledges it’s a serious problem for ordinary families. Two, he explains what he’s trying to do about it.
Biden almost never talks about the stock market—but maybe he should start acknowledging the pain it is causing, too. The S&P 500 index is down 24% from its peak early this year. The tech-heavy NASDAQ is down by a punishing 33% from its peak last November. Stocks rise and fall as a matter of course and don’t ordinarily warrant presidential attention. But this bear market, which worsened in September, may be casting a new layer of gloom over already dour Americans.
The driving force behind the 2022 market rout is inflation, and the Federal Reserve’s late yet urgent effort to jack up interest rates and bring inflation down. Rate hikes make borrowing more expensive, which tends to cut into spending and slow growth. Higher borrowing costs also trim corporate profits, which is one factor pushing stocks lower. Investors are also grappling with how much collateral damage the Fed may cause as it hikes rates, and the possibility of a recession that hits profits even harder.
A bear market in stocks doesn’t hit consumer confidence as hard as inflation itself, especially the soaring gas prices that shocked drivers during the summer. Confidence bottomed out as gas prices peaked, then began to recover as gas prices fell. But confidence turned downward again in mid-September, according to Morning Consult’s daily tracking survey. That coincided with an ugly market selloff that has pushed the S&P to its lowest level in nearly two years. Biden’s approval rating had improved from 38% in July to 43% in early September, but it’s now dipping again, along with stocks.
The stock market was a tailwind for Biden during his first year in office. At the end of last year, the stock market’s performance under Biden was the second best of any president going 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 into Obama’s first term, with an epic rally kicking off. The market under Biden has now fallen from second best to sixth, as this chart shows:
When asked about stocks, Biden typically says the stock market isn’t the real economy, then reels off a few better-sounding stats about job growth or legislation he’s signed. He’s right and wrong. It’s true that the direction of stocks doesn’t directly affect most people’s paychecks. People with investing or retirement accounts don’t lose money just because the value of stocks goes down. They only lose money if they sell low and lock in declines. Many prudent investors can simply wait out a bear market, since stocks are normally a longer-term investment.
But the stock market does reflect what’s going on in the real economy, and a bear market often presages a recession. When stocks drop substantially, investors are usually betting on a decline in future corporate profits and cash flows. Some economists think the US economy is due for a recession within the next year or so, and the bear market in stocks could be one sign it’s coming.
When stocks fall enough, there’s also a negative “wealth effect” that makes people who do have an investing or retirement portfolio feel poorer, and sometimes rein in spending. That may be happening now, given that consumer spending is cooling. That affects the economy too, since consumer spending accounts for around two-thirds of all economic output.
This isn't necessarily Biden's fault
Did Biden cause the 2022 bear market? Generally, no. He did champion and sign the Democrats’ 2021 stimulus bill, which probably contributed a bit to inflation, currently running at 8.3%. But the bigger causes of inflation have been goods shortages created by the COVID pandemic and a super-tight job market that’s making labor more expensive. Russia’s barbaric war in Ukraine is another factor, since it’s pushing global energy costs higher.
One can argue that the Federal Reserve should have seen all this coming and starting hiking rates earlier. But Biden doesn’t control the Fed—and he has pointedly promised not to hector the central bank to do this or that, the way his predecessor Donald Trump did.
Trump also tried to talk up the stock market, when it was plummeting at the onset of the COVID pandemic in February of 2020. That didn’t work. Stocks recovered in April of that year when the Fed rolled out an extraordinary set of liquidity programs and rate cuts meant to help financial markets recover. Those measures worked. Maybe too well. The Fed has now reversed that easy-money policy and to some extent is reclaiming gains in risk assets that may have gone too far.
Biden and his fellow Democrats have had solid momentum since mid-summer, thanks to plunging gasoline prices and a raft of legislative victories for Biden. For a fleeting moment, it looked as if they might be able to defy the customary political snapback effect that costs the president’s party seats in the midterm election, and maintain control of Congress. For that to happen though, Biden’s approval rating probably needs to be close to 50%, and it’s simply not going to get there with financial markets issuing regular warnings that the Fed might be fomenting a recession. Maybe markets will settle down by the next set of elections, in 2024.