Donald Trump and his team may be the masterminds of the stock-market selloff. He may use the crash to force the Fed to cut rates.
Eight months away from the presidential elections, Donald Trump issued a dire warning that the stock market “will crash like nobody has seen before” should voters choose to kick him out of the White House.
It appears that voters don’t have to wait for the presidential elections to witness the stock market cratering. The Dow Jones just printed its worst two-day percentage plunge in two years while the S&P 500 is down 7.8% from its all-time high. The stock market is tanking so it can serve Trump’s reelection campaign in November.
One of Trump’s greatest achievements as president is the record-setting stock market. Under Trump’s presidency, equities have consistently printed fresh all-time highs. The S&P 500 climbed by as much 62.9% since Trump took office in November 2016. The Dow skyrocketed more than 65% over the same time period.
According to Bespoke Investment Group, the gains of the S&P 500 since Trump was elected are more than double the returns of his predecessors three years into their term dating back to 1928.
There’s no doubt that Trump will leverage this achievement to get reelected, but not in a way that most people think. Trump can take advantage of the current stock market selloff to get further rate reductions from the Federal Reserve. The rate cuts can resuscitate a crashing stock market before the presidential elections.
Will Meade, a billion-dollar hedge fund manager, echoes this sentiment. He believes that the rate cut will boost the economy and the stock market right in time for the election.
While I’m not sure that Trump is really behind the selloff, he can definitely use the stock market crash as an opportunity to boost his candidacy.
In October 2019, the Federal Reserve said it plans to keep rates stable unless the economy faltered. In other words, the Fed is not ruling out further rate reductions in the future.
This gives Trump and his team the window to strong-arm the Fed to get a big rate cut in March. With the stock market cratering, Trump can weaponize Twitter to achieve his goal. A study has shown that the Fed is likely to succumb to Trump’s tweets. It appears that the stars are aligning for a massive rate cut in March.
The question now is whether rate cuts can actually drive the stock market higher. Historical data show that the S&P 500 rose by an average 11% after six months when the Fed cut rates during an economic expansion.
JM Vala of LayupTrades.com thinks that rate cuts will help stabilize the stock market. He told CCN.com,
I think that yes, the Fed rate cut will help stabilize the market. Also, we were expecting zero rate cuts and we are now looking at up to three this year.
Other analysts are not so optimistic about the impact of more rate reductions.
Mati Greenspan, founder of Quantum Economics said,
At this point a rate cut would be a waste of a policy tool and I think the Fed knows that.
Jason Harris of StockHunterTrading.com shares Greenspan’s view. When asked if rate cuts would help prop up the stock market, he answered,
Not really. I think low interest rates are going to be the new norm for a few years if not decades.
For now, Trump can blame the coronavirus for the cratering stock market. I imagine it would do his campaign wonders if he becomes the hero that resuscitates stocks in the coming months. Given this context, it appears that Trump will once again come out on top of this situation.
The above should not be considered trading advice from CCN.com. The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.