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Markets are reacting relatively calmly to the news that President Donald Trump and First Lady Melania Trump have tested positive for Covid-19. The S&P 500 is off 0.8%, Dow Jones Industrial Average is down a mere 0.3%, although the tech-heavy Nasdaq is down more than 2% on the news.
The question now is how will markets perform over the next several days and weeks. The answer may lie in how bad a case of coronavirus President Trump ends up with.
Could Trump’s Covid-19 Diagnosis Interrupt the Recovery?
The news upends an already chaotic few months. In some ways, the economy has strengthened remarkably since the onslaught of the coronavirus pandemic, with home sales and consumer confidence growing more robust, and unemployment dropping from almost 15% in the spring to 7.9% in September as employers added 661,000 jobs.
Nevertheless, a recent uptick in cases throughout Europe and in parts of the United States caused stock market participants to get antsy. The S&P 500 dropped about 7% from its high on September 2 to September 29, per CFRA chief investment strategist Sam Stovall.
“Despite the solid economic backdrop, equity investors increasingly sound like Oliver Twist, stating the need for more,” Stovall noted.
This isn’t the more they had in mind.
Historical Market Reactions to Presidential Health
When the health of the most powerful person in the world is compromised, investors tend to sell—at least in the heat of the moment.
For instance, the DJIA went from up 6 points before President Reagan was shot in March 1981 to down almost 3 points after news of his injury became known. Stocks also briefly dropped after President John F. Kennedy was assassinated in 1961. Markets were already in chaos when President William McKinley was assassinated in 1901, although the impact of his death is challenging to disentangle from the Panic of 1901, which got started earlier in the year.
Sometimes a presidential crisis has long lasting implications. For instance, mergers and acquisitions were going gangbusters during President Mckinley’s administration, according to a 2018 National Bureau of Economic Research paper. His death put Vice President Theodore Roosevelt in the Oval Office, and he took a much tougher stance on big business and fashioned himself a trust-busting progressive hero.
The Mckinley case, however, is more the exception than the rule.
The nation mourned after JFK’s death, but the economy didn’t stop. Even after the events in Dallas, TX, even after Jack Ruby shot Lee Harvey Oswald, the U.S. economy continued to expand. The DJIA finished up 17% in 1963, followed by two more years of tidy returns.
The attempted assignation of President Reagan (which resulted in the death of his Press Secretary James Brady 33 years later) was perpetrated by a man overly infatuated with actress Jodie Foster. The nation was about to enter a nasty recession brought on by a Federal Reserve determined to break the stagflation that stifled the economy. Stocks would go on to drop more than 9% in 1981, before rebounding tremendously, jumping about 20% in both 1982 and 1983.
And keep in mind, President Trump isn’t the first world leader to be afflicted with Covid-19. British Prime Minister Boris Johnson tested positive for coronavirus in late March, before eventually entering the intensive care unit for four days in early April. This was at the onset of the pandemic, before more sophisticated treatments emerged and uncertainty reigned. Johnson eventually recovered, as did investors.
While you can understand folks getting out of trades as the world looks uncertain, the actions of a president, even their health, doesn’t have a lasting effect on investor willingness to take risk.
Companies will continue to sell things, and investors will want a future claim on those profits. After all, the S&P 500 took but a day to recapture its losses after JFK’s shooting. The lasting impact on the country, not to mention his family, was another matter.
Markets Are Unpredictable, Always
Investors can easily fall into a deterministic hole whereby they reason an outcome is likely to occur because of an antecedent. Take the pandemic.
When the pandemic overwhelmed northern Italy in late February and March, investors began to sell en masse, terrified that a novel coronavirus would not only deliver horrifying health consequences, but ruin businesses as well.
That caused the swiftest bear market in history, and concerns that the world would face a depression in addition to Covid-19.
Those who decided that owning businesses no longer made sense for their long-term wealth, though, ended up missing out on a charging rebound, with stocks not only erasing all losses within a matter of months but actually, albeit briefly, eclipsing pre-pandemic market highs.
Investors are now feeling themselves, according to a Bank of America research note.
“September saw a tick up in equity sentiment following a pause over the last two months,” analysts wrote. “At 56.0%, the Sell Side Indicator, our measure of Wall Street strategists’ bullishness on stocks, is now back to pre-COVID levels.”
There’s a reason why the vast majority of new money is piling into passively invested funds that try to track the market: very few know what tomorrow will bring.
The State Of The Economy
President Trump’s positive Covid-19 test came on the same day as the Labor Department released the final monthly U.S. jobs report before the November 2020 election. The report showed the unemployment rate dropped to 7.9% in September from 8.4% in August, as employers added more than 660,000 jobs.
While the economy has made up lots of ground since the worst of the pandemic, more than 10 million Americans remain unemployed, and thousands are still losing their jobs or leaving the workforce altogether. The uncertain situation around school openings has had a particularly deleterious effect on female employment.
The current precarious situation is why Fed Chair Jerome Powell, as well as other central bank officials, have pleaded with White House and Congress to agree to a second massive stimulus package. Despite some positive developments, prospects of a deal look unlikely.
“[T]oday’s [jobs] number clearly reinforced that the Fed’s tools are blunt in terms of their real economy impact from here, and the need for more targeted, and timely, fiscal stimulus will be what’s required to more directly improve the jobs and income well-being of the broad economy today,” noted Rick Rieder, BlackRock’s chief investment officer of global fixed income.