Trump may be forced to introduce creative new fiscal policy to support the stock market going into the 2020 re-election cycle.
The stock market is showing signs of life after the worst week since the 2008 recession. The Dow Jones Industrial Average (DJIA) soared toward an astonishing 800 point recovery following a volatile futures session.
Headlines this morning focus on the wave of central bank stimulus coming. But the real safety net may come from Trump himself. According to Credit Suisse, the White House will likely step in with fiscal policy to counter the coronavirus impact.
Fahd Iqbal, head of Middle East research at Credit Suisse stated:
We can’t rely on the Fed to be the be-all in this situation. It has to be government led.
And you better believe Trump will do everything in his power to keep the stock market afloat. His re-election in 2020 depends on it.
The Dow Jones made a strong recovery as Monday’s session matured, following Asian and European stocks higher. It signals a brief respite after a week of brutal selling.
As of 12:59 pm ET, here’s how Wall Street’s major indices were faring:
Central banks around the world are loading up the liquidity canons to stop the market bleeding out. On Friday, Federal Reserve chairman Jerome Powell said he wouldn’t hesitate to act.
We will use our tools and act as appropriate to support the economy.
The Bank of Japan said it would provide “ample liquidity and ensure stability in financial markets.” And expectations for the Bank of England to cut rates in the UK rose above 60%. Stocks in Asia and Europe rallied this morning in anticipation of fresh stimulus.
Marc-André Fongern at Fongern Global Forex added:
The market’s growing hopes regarding potential rate cuts on a global scale may ensure a rather cheerful mood for the time being.
Central banks might stem the bleeding for now, but the real recovery will come from government fiscal policy.
Credit Suisse’s Iqbal added:
The Fed will do what they can but, at the end of the day, central bank policy is close to its limit … Fiscal policy will have to come in strong at some point in the future to really step in where monetary policy is now less effective – .
We’re already seeing this in Hong Kong, China, and Italy where the virus has taken hold.
Hong Kong gifted its citizens 10,000 HKD (about $1,200 USD) and removed some tax obligations. Italy introduced a wave of tax credits for businesses hit by the coronavirus. And China considered bailing out airlines via a series of mergers.
If the U.S. economy takes a similar hit, we can likely expect creative new fiscal policy announcements here too.
The timing is particularly important for Trump as he begins his re-election campaign. The president has frequently used the stock market as a barometer for his success. So he needs the Dow and S&P near record highs to maintain his momentum.
A Moody’s report last year confirmed that Trump would “steamroll the competition” if the economy holds up. The hypothesis is backed by record confidence in Trump’s handling of the economy. But a correction or recession would put his re-election at risk.
Moody’s chief economist Mark Zandi told CNBC:
A 12% market correction around election time could sway the race, as could an unexpected downturn in the economy.
Simply put, if central bank easing doesn’t stop the selloff, you can bet Trump will.
Last modified: September 23, 2020 1:37 PM