Dalton, Mass. — On the morning of Friday, Oct. 2, the world learned that U.S. President Donald Trump and first lady Melania Trump both contracted COVID-19. There has been no shortage of pundits telling us how this will affect the Nov. 3 presidential election. The opinions are mixed as to whom this news will benefit.
For now, I don’t see any change in the four scenarios I ranked last week from most likely (Biden wins, Congress stays mixed) to least likely (Republican sweep). But that’s not today’s conversation. My assessment of highest-probability to lowest-probability outcomes has not changed since last week.
Let’s focus on the stock market. In particular, let’s focus on the 27 days until Election Day. I know, I know: It’s not good to focus on the short term when it comes to investing — or so they say. But isn’t the short term part of the long term?
First, let’s note that Trump isn’t the first world leader to contract the coronavirus. Boris Johnson, the British prime minister, was the first prominent political leader to make his diagnosis public, on March 27. Johnson was hospitalized for a week, spent three days in intensive care and went back to work on April 27. Other nations’ leaders include Russia, Armenia, Honduras, Brazil, Bolivia, Belarus and Guatemala.
There are elements of President Trump’s diagnosis that will be both good and bad for the stock market in the short term.
In sum, the possibility of businesses being locked for longer threatens the stock market.
Remember when the stock market crashed in March as the economy was being shut down to force social distancing? Of course you do. This high-profile COVID-19 diagnosis is an example of testing not being enough to keep the coronavirus at bay. As a response, there may be a reemphasis on social distancing.
The White House has relied on a strategy of screening and rapid COVID-19 testing by using Abbot Laboratories’ ID Now product. People are required to be tested to be allowed in the White House. Think of it as passing through a metal detector when entering an airport: If you pass the screening, then you get to enter.
Per a statement from White House spokesman Judd Deere, “in addition to encouraging social distancing, readily available hand sanitizer, and recommended facial coverings, those in close proximity to the President continue to be tested for COVID-19 to ensure exposure is limited to the greatest extent possible.” Some of these factors probably account for why President Trump and other administration officials have been known to socially gather without masks (despite the statement saying otherwise).
There has been scrutiny over the Saturday, Sept. 26, open-air Rose Garden ceremony to announce President Trump’s Supreme Court nominee, Amy Coney Barrett. A growing number of infections have been linked to this event, despite stringent testing protocols.
Listen, I can point my finger at liberal bad actors here in Massachusetts who gathered at house parties and weddings, which have received some local coverage. Such a high-profile potential “super-spreader’ event is bound to have more impact on decisions regarding safety efforts. The number of daily COVID-19 cases in the U.S. has been trending up since Sept. 8, threatening the much-dreaded “second wave.” The president’s health reminds us that not only is the pandemic not over, but it is reasonable to expect that business lockdowns could continue for longer.
Social distancing responses aside, President Trump’s health issues should not affect the stock market.
Ronald Reagan survived an assassination attempt. Woodrow Wilson fell ill during the 1918 pandemic and suffered a severe stroke. Eight out of 45 presidents (or 17.8 percent) have died while serving in office. Four passed due to natural causes (Warren Harding, Willian Henry Harrison, Zachary Taylor and Franklin D. Roosevelt). Four were assassinated (Abraham Lincoln, James Garfield, William McKinley and John F. Kennedy). Due, in part, to a seamless and trusted transfer of power to the vice presidents, the stock market proved mostly resilient despite these tragic events. However, this time, given the proximity to the election, I don’t suspect there will be too many investors stepping up to buy stocks, leaving prices vulnerable to any waves of selling.
It’s not bullish for the stock market when the leader of the largest economy on the planet falls ill to a virus that has killed more than 1 million people. If nothing else, it adds to the uncertainty. However, I don’t suspect it will be the cause of anything meaningfully detrimental. It’s not enough to make me sell my equity positions.
One thing that will get buyers to get cash to work in the stock market will be a bet that Congress will pass a fiscal stimulus package.
The double bad
This column has a deadline of noon on Tuesday and is uploaded on the following Wednesday. At 2:53 p.m. on Tuesday, President Trump instructed representatives to not negotiate the stimulus until after the election. And just like that, my “The Good” scenario just got blown out of the water. In sum, I felt as if there would be a push to get another round of fiscal stimulus passed and that would be a tailwind for stocks.
With President Trump under quarantine for up to a total of 14 days, political strategists suggested that he may push for a new fiscal policy stimulus to counter any loss of momentum he might have otherwise gained from the recent months of big job gains for the U.S. economy. President Trump supported this this sentiment with the tweet that begins this article.
Hopefully this is merely a bargaining strategy by Trump, but nonetheless, this is bad news for the market.
Last Friday, the Bureau of Labor Statistics announced that nonfarm employment rose by 661,000 in September, and the unemployment rate fell from 8.4 to 7.9 percent. However, the unemployment rate fell for the wrong reason. Frustrated people left the workforce.
The gain of 661,000 jobs is, on the surface, good news. However, it is dramatically less than the 1.3 million average of the prior three months. After having rebounded from reopening the economy, the labor market is losing momentum. Most troubling is that although the number of temporarily laid-off workers fell, permanent job losses rose 300,000 to 3.76 million, compared to 1.29 million before the pandemic (and the highest since 2013).
The best way to reduce permanent job losses quickly is to get a new fiscal stimulus package passed. Otherwise, people in the U.S. will be unemployed a lot longer than some might suspect. I have heard experts suggest that nearly all the lost jobs will come back soon after a vaccine is created. I think that’s overly hopeful. If you calculate the average monthly growth rate of job gains for the last dozen U.S. economic expansions and then apply the median historical growth rate, payrolls reach pre-pandemic levels in mid-2023. That is a generous calculation, given that the range was two years at the fastest to nine years at the longest.
President Trump’s Oct. 3 tweet is right: The economy needs stimulus — to help those who have been forced out of work pay their bills and put food on the table, and also because without it, I suspect that getting employment back to pre-pandemic levels won’t happen by mid-2023, but rather many years later.
It is disappointing and reckless that Congress has taken nearly six months to pass another round of stimulus. If something significant is not passed and soon, the risk is that this prolonged congressional stalemate’s economic impact allows the economy to weaken to the point that it’s nearly impossible to re-emerge without continued fiscal stimulus for years, if not decades.
Do you think I’m being hyperbolic? There is precedent. It happened in Japan during the “Lost Decade” from 1991-2003. The Lost Decade was a time when Japanese companies were only able to generate enough cash flow to pay interest on their debts, as Japanese banks continued to support weak or failing firms instead of letting them go out of business.
This new twist is worrisome. The stock market could be in for a bumpy ride for the next 29 days.
This article was originally published in The Berkshire Edge on October 7, 2020.