The Markets’ Visceral Reaction to the End of Fiscal Stimulus
Yesterday, President Trump put an end to Congress’ efforts to assemble a fiscal stimulus package.
Yesterday, President Trump put an end to Congress’ efforts to assemble a fiscal stimulus package, instructing his representatives to stop negotiating until after the election. This was announced not too long after Fed Chair Jerome Powell’s appeal for a more aggressive fiscal policy response in order to not thwart the recovery that the U.S. is experiencing. He cites that there is “a long way to go” in order for the economy to get back on track and that withholding fiscal stimulus would weaken the recovery and create undue hardship for businesses and families.
With fiscal stimulus negotiations being dead in the water, markets reacted very strongly. S&P 500 closed 1.4% down on the day yesterday, NASDAQ 1.6% down, and the Dow 1.3%.
However, even as it seemed like Trump got up and walked away from negotiations, he tweeted later Tuesday night about Congress immediately passing aid for airlines and for the Payroll Protection Program.
He also proposed a stand alone bill for another round of stimulus checks amounting to $1,200 to Americans “immediately”.
He again put on the pressure for this specific bill this morning.
It’s not entirely clear what happened that made President Trump change course—whether he listened to the outcry or whether he’s implementing a negotiation tactic to re-leverage the discussions in his favor
Regardless, markets heard the message right away and responded favorably.
The S&P is up 1.4% today, and the NASDAQ is up 1.7% and the Dow 1.6% as they recover some of yesterday’s losses
US airlines are up too after experiencing deep declines yesterday – United is up 4.6%, American Airlines 4.4%, Delta 3.2%, Spirit 3.9%, and Southwest 2.6%.
Treasury yields experienced a slight decline yesterday, but have since bounced back.
SPX futures dipped yesterday as well, but are also rallying again today.
And the VIX also spiked on the announcement of the end of stimulus negotiations, but has been tapering off throughout the day.
Interestingly enough, the VIX curve’s movement between Monday, as expressed by the blue line, and Tuesday, which is the orange, experienced very little movement in the futures whereas the spot price experienced the greatest spike. Between yesterday and today, today being green, the curve fell.
It’s possible that the VIX futures barely moved between Monday and Tuesday as Trump’s original intent was to save a larger stimulus package for after election, which is less than a month away. Trump changing course today for targeted, immediate aid may have ultimately lowered vol all together.
Congressional Democrats have been very vocal about Trump walking away from a more comprehensive plan for fiscal support before the election as hundreds of thousands of Americans are in dire need right now. However, we’ll see how Congress responds now to his call for action since he has flipped the negotiations on its head.
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