President Donald Trump Says No Stimulus. Why the Stock Market May Still Get What It Wants. - Barron's

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Apparently, the stock market really was counting on a stimulus package, as the Dow Jones Industrial Average slid more than 300 points after President Donald Trump said there would be no more stimulus talks until after the election.

The S&P 500 dropped 1.4%, while the Nasdaq Composite slid 1.6% and the Dow fell 377.99 points. or 1.3%.

As with so many things from the president, it began with a tweet.

The market had been holding up OK throughout most of the day, even if the moves were nothing to write home about. The news, too, was rather uneventful. August’s trade deficit of $67.1 billion was the largest since 2006. Job openings came in better than expected, but still lower than the previous month. Only two stocks reported earnings— Paychex, which reported a beat before the open, and Levi Strauss, which reported a surprise profit after the close. (The former fell 2.5% during regular market hours, while the latter jumped 12% after the close.) It was interesting, but nothing to get excited about.

Trump’s tweet, on the other hand, set off a sudden wave of selling by equity holders—and a sudden rush into bonds, with the 10-year Treasury yield, which had been over 0.78% earlier in the day, closed at 0.744%. Airlines, which had been hoping for a piece of that stimulus action, fell, with American Airlines (AAL) finishing off 4.5%, and United Airlines (UAL) down 3.6%. Boeing, which had released a rosy aviation outlook earlier in the day, fell 6.8%, making it the Dow’s worst performer by far.

“Stimulus talks were crucial for stocks this week, but today’s shocker completely changed the short-term picture on the Street, and we have to wait and see to decide if today’s plunge was only a ‘one-day-wonder’ or the start of a more durable shift,” writes Gorilla Trades strategist Ken Berman

Perhaps most surprising was that the market didn’t fall even more. Of course, there are mitigating factors, including Trump’s tweets, which predicted he’d win the election and pass a relief bill after it was over. A Democratic sweep would likely mean the same thing, so stimulus is likely delayed, not dead. Trump, notes Evercore ISI’s Sarah Bianchi could also change his mind and resume negotiations if he thought it would help his cause.

In the meantime, all eyes will now turn to the Fed. In a speech today, Fed Chair Jerome Powell called, once again, for more stimulus, arguing that failure to do pass a relief package would “unnecessary hardship.” With stimulus off the table for now, the Fed may have to do more, Bianchi says.

“We believe the collapse of the fiscal stimulus talks increases the likelihood that the Fed will strengthen its QE program by moving to an open ended economic outcome-based program with a longer duration skew in its purchases in December,” she writes. “If there is a serious loss of momentum in Q4 as fiscal savings are exhausted and the prospects for fiscal remain severely challenged after the election the Fed may also increase the pace of QE from $120bn a month to $150bn or $160bn.”

In other words, stimulus may be on the way—just not the stimulus investors were hoping for.

Write to Ben Levisohn at Ben.Levisohn@barrons.com

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