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Here’s How Much the S&P 500 Can Fall Without Immediate Stimulus Relief

Last Updated October 7, 2020 5:52 PM
Stephanie Bedard-Chateauneuf
Last Updated October 7, 2020 5:52 PM
  • President Trump said Tuesday he’ll delay stimulus talks until after the election, sending stocks lower.
  • BTIG says the S&P 500 could fall at least another 7% without a stimulus bill.
  • Trump signaled support for some stimulus relief on Tuesday night.

President Donald Trump announced Tuesday that he was halting stimulus talks until after the election, causing stocks to drop suddenly before markets close.

Trump instructs his representatives to end stimulus talks with Democrats until after the election. Watch the video below:

Trump’s declaration to end stimulus negotiations took Wall Street by surprise as the market rose in hopes that a second deal could be reached before the election. The move on Tuesday triggered a sharp selloff in recovery-sensitive stocks, such as airlines and retailers.

Jerome Powell, the Federal Reserve chair, argued during a speech on Tuesday that failing to provide enough support carried risks for the economy :

Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy and holding back wage growth.

Fed Bank of Minneapolis President Neel Kashkari warned that delaying stimulus will have ‘enormous consequences’  and that the downturn will end up being much worse.

Several major Wall Street say they would lower their growth forecasts if negotiations stalled.

The S&P 500 Could Drop 7% Without Immediate Stimulus Bill

BTIG, a global financial services firm specializing in institutional trading, believes the selloff is far from over.

Julian Emanuel, BTIG’s chief equity and derivatives strategist, said  the S&P 500 is vulnerable to test its 200-day moving average of 3,113, which is roughly 7% below Tuesday’s close of 3,360.95. The moving average is a widely observed momentum indicator.

Emanuel said in a note on Wednesday: 

Tuesday’s events open up the potential for immediate downside to the SPX 200 DMA (3,113) and reinforces the idea that the outcome of the Election is likely to be unclear, contested or both.

Emanuel indicated that market weakness in the run-up to Election Day could hurt Trump’s re-election chances if history is any guide. When the market has been higher in the 90 days before the election, the incumbent won 85.7% of the time. Investors should expect wilder moves in the market between now and the election:

While weakness between now and Inauguration Day (1/20/21) is likely a buying opportunity – with low rates, eventual further stimulus and medical progress on the Virus supportive elements for 2021 – we are reminded that in a period of elevated volatility and uncertainty that the long run is made up of a series of short runs which are frequently gut-wrenching.

Stocks Gain on Hopes of Partial Relief

There is still hope for short-term help. Trump tweeted Tuesday night  that Congress should approve $25 billion in emergency funding for airlines and $135 billion for the currently exhausted Paycheck Protection Program. The president subsequently backed another round of direct payments. He’s “ready to sign right now” if a standalone bill for the $1,200 checks reached his desk.

donald trump tweet
Trump is ready to sign another round of $1,200 stimulus checks. | Source: Twitter 

The S&P 500 soared more than 1% after the news.

s&p 500 index
After plunging more than 1% on Tuesday, the S&P rose by more than 1% after Trump tweeted about a targeted stimulus. | Chart: Yahoo Finance 

While Trump’s support for piecemeal stimulus clearly boosted investor sentiment on Wednesday, some analysts were skeptical of the impact it could have.

Alec Phillips, an analyst at Goldman Sachs, wrote in a Wednesday note: 

A piecemeal approach might allow for only a very limited amount of fiscal relief.

Focus turns to individual items as comprehensive stimulus talks end. Watch the video below:

A comprehensive deal is needed to support the U.S. economy and the stock market.