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Warning: Our Next Stimulus Deal Could Cause a Massive Stock Market Crash

By Maurie Backman – Jul 25, 2020 at 6:18AM

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If a follow-up relief package is overwhelmingly stingy, it could impact the stock market in a manner investors won't like.

When COVID-19 first took hold back in March, the stock market reacted almost instantly, plunging into bear market territory for the first time in over a decade. But stock values have recovered nicely since then, to the point where you almost wouldn't think we're in a recession.

When we look at factors like unemployment, however, the numbers tell a very different story. In fact, it's because of rampant joblessness, among other economic factors, that lawmakers are currently in the process of debating a second stimulus package.

In March, the CARES Act was passed to provide COVID-19 relief, and it included a number of key provisions, including boosted unemployment and direct $1,200 stimulus payments to eligible Americans. But boosted unemployment is set to expire at the end of July, and many of those who received their stimulus cash earlier in the year have spent it. As such, Americans are desperate for added relief, and if it doesn't come through in a generous-enough fashion, it could drive the stock market into another plunge.

Downward arrow in front of numbers on a screen

Image source: Getty Images.

Gear up for volatility

If you were to look at the stock market's performance alone over the past few months, you almost wouldn't know that the country is grappling with a widespread financial crisis. But investors shouldn't assume stock values will stay high forever. As we saw back in March, bad news on the COVID-19 front could easily cause stocks to plummet, and if a follow-up stimulus deal is overwhelmingly disappointing, the market could react similarly.

What would a disappointing stimulus deal entail? For the millions of jobless Americans, it means no unemployment boost or a boost that's far less substantial than the extra $600 a week jobless folks have been getting over the past few months.

And then there's the matter of a direct stimulus check. Republican lawmakers initially pushed back on that idea, stating that direct aid wasn't needed in light of a reopening economy. But recently, they've changed their tune, so it seems like a second stimulus payment may be in the cards. But whether it's as generous as the first round is yet to be determined. Furthermore, there's been talk that a follow-up stimulus round will only be targeted at lower-income Americans, leaving millions out in the cold.

All of this could spell trouble for stocks, and investors need to be prepared for that. Of course, the best way to get through a period of turbulence following negative stimulus news is the same strategy it pays to employ, in general: Sit tight and don't panic-sell.

In the course of July, COVID-19 cases have surged, and while that's bad news from both a health and financial perspective, the stock market hasn't reacted too badly. Even if there's backlash following a less-than-stellar stimulus deal, it may be relatively short-lived.

Still, investors would be wise to brace for that possibility -- and set cash aside so that if stock values fall temporarily, they can capitalize on the opportunity to benefit from that volatility rather than get hurt by it.

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