Inflation is the biggest economic issue dominating the midterm election campaign and making Democrats nervous, but the stock market’s performance isn’t too far behind.
The Dow Jones Industrial Average is, at this writing, below where it was when President Joe Biden took office. In September, the S&P 500 took its worst single-day loss in over two years after hitting a record high in January. The Dow fell 1,200 points as Biden and congressional Democrats celebrated the Inflation Reduction Act at the White House. (The markets were spooked by higher-than-expected inflation.)
Fluctuations in the stock market could be another negative on the ledger for the Democrats as they seek to defend their slim congressional majorities. Biden’s low job approval ratings, and even lower ratings on his handling of the economy, endanger the Democrats’ control of Congress. Republicans only need a net gain of five seats to take the House and one seat to recapture the Senate.
Unlike former President Donald Trump, Biden and the White House team did not concentrate on the stock market when it was doing well. This may, to some extent, help them as they downplay the markets performing badly or more erratically.
“The stock market doesn’t necessarily reflect the state of the economy, as you well know,” Biden told reporters last month. “And the economy is still strong. Unemployment is low. Jobs are up. Manufacturing is good.”
“Unlike his predecessor, the president does not look at the stock market as a means by which to judge the economy,” former White House press secretary Jen Psaki told reporters when she was Biden’s top spokeswoman. “Our measure of success is really how real working families are doing.”
But that might reflect outdated thinking about the stock market. Nearly 60% report to pollsters that they own stock, even if ownership is distributed unequally. Many ordinary people have retirement accounts invested in stocks. About a third of those who are of working age have 401(k)s, and nearly a fifth have IRAs.
According to a June estimate by Alicia Munnell, the director of the Center for Retirement Research at Boston College, the stock market selloff cost nearly $3 trillion in retirement funds. The Washington Post estimated in May that 1.5 million retirees had reentered the workforce by that point in the year.
Public pension funds have also lost tens of billions of dollars because of the state of the stock market. These benefit public sector workers, typically a Democratic constituency.
Republicans are making it a major part of their midterm election messaging against Biden and the Democrats. “Americans’ life savings are being wiped out because Democrats spent recklessly and destroyed the economy. Americans work and save their whole lives, and now have less money today than the day Joe Biden and the Democrats took control of Washington,” Calvin Moore, the communications director for the Congressional Leadership Fund, said in a statement.
“Biden robbed grandma and grandpa to pay for his reckless spending,” Republican National Committee Rapid Response Director Tommy Pigott said in July. “An empty speech in Ohio won’t change just how much Biden has hurt retirees.”
Senate Minority Leader Mitch McConnell (R-KY), who would like to retake the majority leader title next year, has also accused Democrats of “cutting the value of America’s retirement savings just as the cost of living has soared.”
This line of attack has the potential to offset the gains among senior citizens Biden and Democrats hoped to reach with provisions in the Inflation Reduction Act that are designed to lower prescription drug costs.
There is precedent for stock market woes hurting the incumbent party in the midterm elections during a period of inflation, going back 40 years. As the Federal Reserve tried to get double-digit inflation under control, the markets began a perilous drop. Financial writer David John Marotta called it “Volcker’s bear market,” after Paul Volcker, the Fed chairman at the time. By early 1982, the market had been declining for more than 450 days.
By November, the stock market had recovered. But it was not enough to reverse the electorate’s confidence in the economy as voters headed to the polls. President Ronald Reagan and congressional Republicans experienced significant setbacks.
Democrats gained more than two dozen House seats, effectively wiping out the bipartisan conservative majority that had passed much of Reagan’s economic program in 1981-82, including the historic tax cuts that became the model for GOP fiscal policy for a generation. They also added a seat in the Senate, though Republicans remained in control of the chamber for the first time since the 1950s.
Those are not unrealistic numbers for the election this year as Biden battles inflation, interest rate hikes, and a lot of volatility in the stock market, whether the White House thinks that’s the most important economic metric or not.
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