Coronavirus Can't Explain Tanking Stock Market, But Bernie's Success Can: Economist
Asked about the precipitous drop in the stock market this past week at the White House on Friday, a drop generally perceived to have been started by the coronavirus epidemic, President Donald Trump had two answers. One was pretty anodyne, not just by the standards of Donald Trump but by Washington at large.
The other set the media off on a frenzy.
The anodyne: “I think it’s just people don’t know — it’s the unknown. They look at it and say ‘how long will this last?'”
The frenzy-causing: “I think they’re not very happy with the Democratic candidates when they see them, and I think that has an impact.”
This led to headlines like The Washington Post’s: “Trump administration tries to play down the health and economic risks of the coronavirus.”
The tone was clear: He was politicizing the Dow Jones and trying to blame it on something other than coronavirus.
NEW: Pres. Trump on the Dow suffering its worst week since the financial crash of 2008 amid fears over impact of novel coronavirus: “I think it’s just people don’t know—it’s the unknown.” https://t.co/BxQEyj3Vaz pic.twitter.com/ZIrAjhNQpc
— ABC News (@ABC) February 28, 2020
To one economist, however, Trump got it entirely right.
In a piece for RealClearPolitics’ financial section (appropriately titled RealClearMarkets), editor and senior economic adviser to Toreador Research and Trading said that coronavirus alone couldn’t have been responsible for the stock market drop. Instead, he said the rise of socialist Vermont Sen. Bernie Sanders in the Democratic presidential field might actually have something to do with it.
“Apple announced last week that the Coronavirus development might limit manufacture and sales of its products,” he wrote. In short, Apple was already priced. Investors already knew the virus might impact one of the world’s most valuable companies negatively.
It should be added that it was already in the news last week that Amazon, fearful of supply disruptions, would be increasing its near-term purchases of inventory with these disruptions in mind.
“Despite all of this news in the marketplace, there wasn’t a major correction in shares. Without minimizing Coronavirus and its impact on people and production, investors have been pricing it for several weeks. Markets lurch in either direction once again based on surprise, and Coronavirus was no longer that.”
What was the cause, then?
Tamny acknowledged that answering it “is a fool’s errand. That’s why headlines about what caused stocks to go up or down are so ridiculous in real time, and positively preposterous when looked at in hindsight. If headline writers possessed a clue about what moves stocks, or even if they possessed a clue about whom to ask about what moves stocks, they wouldn’t be headline writers.”
However, based on speculation alone, Tamny looked at the 2016 election, when the stock market would often correct based on the chance that Donald Trump had of becoming president. Here’s what one investor told Tamny then: “Market’s probability of Trump as president in June? 0%. Today, say what you will, maybe 10%. At least that is what various prediction markets are saying. So, I need to discount 10%.”
In 2020, investors face a problem with similarities to what happened in 2016, he speculates.
“Which brings us to last week. For weeks media members had been marveling at the hundreds of millions spent by Michael Bloomberg, a wildly successful and economically moderate Democratic candidate for President of the United States,” Tamny wrote.
“Though Bloomberg hadn’t participated in the Iowa and New Hampshire primaries, it was broadly assumed that he was a major contender for the Democratic nomination, and precisely because he’s worth tens of billions, Bloomberg was seen as a much more than reasonable opponent of Trump. Capitalist versus capitalist, though in Bloomberg’s case he could buy and sell Trump many, many times over.”
If Bloomberg won, it would mean that the Democrats were done with their flirtation with far-left candidates like Warren and Sanders. You already know the rest of the story.
“In the debates last week Bloomberg was thoroughly attacked by his opponents precisely because his opponents sensed he was ascending to frontrunner status. The big problem was that Bloomberg allowed himself to be throttled,” Tamny wrote.
“And he was throttled despite it being known that he had the best, most seasoned advisors preparing him for the attacks that everyone knew were coming. Bloomberg’s performance was roundly panned, and in the estimation of more than a few pundits, Bloomberg’s candidacy was rendered a past tense concept. In short, the lone capitalist on the Democratic side was pushed aside during the Democratic debates; debates from which a rising semi-socialist in Sanders emerged largely unscathed. Keep in mind that Sanders emerged unscathed even though he basically tied Pete Buttigieg in Iowa, and beat the former South Bend mayor in New Hampshire.”
That had to be priced into the market. So, too, did the fact that Sanders wiped out the field in Nevada.
After all, he points out: “Sanders would be a big departure from Trump in an economic sense. Trump, for all of his weaknesses, is ultimately quite a bit more free market in actions than his rhetoric would indicate. Sanders? Who knows? While it says here that he would again move to the center, Trump he’s not.”
That’s why, Tamny said, coronavirus wasn’t necessarily the culprit.
“Coronavirus? It doesn’t diminish it to point out that investors had long been pricing it. Bernie Sanders was the odd Swan whom investors were forced to reckon with in the past week. That’s the speculation from here.”
Is he right?
As he points out, it would be a “fools errand” to judge. Beyond mere speculation, however, is the fact that Sanders is a very unknown quantity. Yes, we know what he wants to do with (or rather, to) the American economy. Such a fundamental transformation would have to be priced into the market the closer he got to the nomination — and therefore to the presidency.
To say coronavirus has been fully priced in is a bit flippant; the developments of the past week have been unnerving, to say the least. China, the world’s second-biggest economic power, has been ground to a standstill. In the United States, we’re dealing with the first cases where we cannot identify where the individuals were infected; until now, all of the cases involved people who had traveled to affected regions or had been on cruise ships, or those who had been in contact with them.
That said, Bernie is something investors are going to have to price into the market, particularly since the best-case scenario seems to be that he’ll arrive at the convention in Milwaukee with a plurality of delegates for the Democratic nomination. That doesn’t mean he gets nominated or he takes the presidency.
Then again, they laughed at Trump, too.
If he gets elected and we all stop laughing, we have four years of him attacking Wall Street, trying to institute “Medicare for all” and wiping out student loan debt. If you’re an investor, that’s a prospect that is beyond frightening.
Trump may have been mocked for his remarks about the Dow’s precipitous fall, but perhaps he wasn’t as far off as people might like to think.
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