On Tuesday, Oct. 6, President Donald Trump did something mystifying. He tanked the stock market — and created a sense of panic among millions of unemployed Americans and struggling small-business owners — with a single tweet.
Here is how Brian Kilmeade, the Fox News co-host of Fox and Friends, described it:
“For the president to come out with a tweet like that, with the markets still open, just crashed the market and cost people a lot of money.”
For markets, it is rare to have a cause-and-effect result this dramatic. You can see it in the chart below, which shows the S&P 500 index in five-minute increments. (Each bar is a five-minute increment.)
It wasn’t just the stock market that took a hit, with the S&P 500 falling more than 2% between the tweet and the Oct. 6 close. It was all manner of markets, from copper to crude oil to gold, with price convulsions rippling out to stock markets all over the world.
So, what happened exactly? President Trump, via Twitter, said he had canceled all stimulus talks prior to the election. Here is the section that hammered the markets:
“I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business.”
It was then revealed that Trump had ordered U.S. Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows to cease and desist negotiating the terms of a new stimulus bill, which had been narrowed to a range between $1.6 trillion and $2.2 trillion.
Making matters worse, Federal Reserve Chairman Jerome Powell had issued a dire warning earlier the same day.
Failing to step up with more fiscal stimulus could “lead to a weak recovery, creating unnecessary hardship for households and businesses,” Powell had said in a speech to the National Association for Business Economics.
“By contrast, the risks of overdoing it seem, for now, to be smaller,” Powell added. “Even if policy actions ultimately prove to be greater than needed, they will not go to waste.”
The United States, as a country, is basically in full agreement — or as close to full agreement as it gets — that the U.S. economy needs more help.
Last week’s jobs report indicated a slowing recovery, at a time when millions of Americans and millions of small businesses are struggling. At the same time, the eviction threat is rising, food insecurity is at levels not seen since the 1930s, and the unemployment situation is still worse than its worst levels of the 2008 financial crisis.
Ordinary Americans agree, top CEOs agree, and the Chairman of the Federal Reserve agrees: The U.S. economy is not in a normal situation. If anything, the country is still fighting to escape the jaws of a severe recession, or even a depression. There remains a significant risk that, if a critical mass of small businesses are allowed to fail, the economy could be hobbled for years.
The action from President Trump was further mystifying because, on Saturday, Oct. 3, he had tweeted the following from Walter Reed:
“OUR GREAT USA WANTS & NEEDS STIMULUS. WORK TOGETHER AND GET IT DONE. Thank you!”
Tuesday’s directive to cancel the talks was a total reversal of Saturday’s sentiment.
Political observers were mystified by Trump’s decision to cancel the stimulus talks.
Helping the U.S. economy and the stock market with trillions of dollars in support would seem to be a slam-dunk for an incumbent president less than a month from Election Day.
For decades, Wall Street analysts have assumed that presidential election years are more bullish than other calendar years, with statistical evidence to back the claim. This is likely because, in an election year, the incumbent president is likely to press for helpful policy actions from the Federal Reserve and Congress to shore up the economy and boost re-election efforts.
The stronger the economy, the better it is for the incumbent. The weaker the economy, the better it is for the challenger. This is fairly open-and-shut logic.
Given that reality, nobody could figure out why President Trump wanted to not only cancel the talks, but take public responsibility for doing so. For those who need help — and for investors who suddenly saw their screens turn red — the statement “I have instructed my representatives to stop negotiating” is point-blank ownership of a potential disaster.
On Saturday, the President injected markets with optimism through his pro-stimulus sentiment. Then, on Tuesday, he took that hope away in brutally surprising fashion, with the reversal all the more damaging because it was so unexpected.
Then, Tuesday night — perhaps after an emergency consultation with frantic advisers — the president seemed to change his mind for a third time, tweeting the following:
“If I am sent a Stand Alone Bill for Stimulus Checks ($1,200), they will go out to our great people IMMEDIATELY. I am ready to sign right now. Are you listening Nancy?”
In another Tuesday night salvo, Trump also seemed to support a new airline bailout and a new round of PPP (paycheck protection program) small-business support, leaving his position entirely unclear.
As a result of these flip-flops, the stock market and the U.S. recovery have been placed on uncertain ground. At the same time, Trump’s decision to cancel stimulus talks caused vulnerable Republican senators to panic at the prospect of being blamed for the pulling of fiscal help.
Sen. Susan Collins (R-Maine), one of the most vulnerable Republicans in the Senate, said the following in a statement:
“Waiting until after the election to reach an agreement on the next Covid-19 relief package is a huge mistake. I have already been in touch with the Secretary of the Treasury, one of the chief negotiators, and with several of my Senate colleagues.”
It isn’t clear whether the stimulus relief talks will restart, or whether Democrats will respond to the president’s revised offers.
Meanwhile, even as President Trump has freshly ignited “gridlock” fears — the risk of the U.S. government shutting off the fiscal taps — his actions have also made the “Biden Sweep” election scenario an even greater probability, which means investors are starting to anticipate a larger spending round from a Democrat-controlled White House, Senate, and House of Representatives.
There is still a meaningful amount of short-term danger, though, because millions of small-business owners are close to an economic breaking point, if not already there. If they are forced to wait another few months for some form of renewed fiscal relief, it may be too late.