How Donald Trump lost the financial markets — thanks to Mitch McConnell

How Donald Trump lost the financial markets — thanks to Mitch McConnell
President Donald J. Trump and Vice President Mike Pence walk with Senate Majority Leader Mitch McConnell, R-Ky., and Senator Roy Blunt, R-Mo., Tuesday, March 10, 2020, upon their arrival to the U.S. Capitol for a Senate Republican policy lunch. (Official White House Photo by D. Myles Cullen)

Donald Trump has a recurring "go to" line which he has trotted out over and over throughout his entire 2020 campaign: that a Biden presidency would tank the financial markets and send millions of 401k's reeling into a Depression. Considering the fact that he'd inherited a booming economy and a rising stock market to match from former president Barack Obama, Trump's claims in this regard never had any basis in reality. The economy under Democratic presidents always outpaces, on balance, those of Republicans, a fact which even Koch-type libertarians will glumly stipulate to.

But Americans have notoriously short memories, and Trump knows that. So explains his fixation on the stock market as the lodestone for whatever ad hoc financial policies his team of radical economic incompetents could dream up, to the point where they actively engaged in ginning up temporary boosts to the markets as a substitute for any coherent fiscal policy. Announcing phony "agreements" with the Chinese government to draw attention away from a wholly disastrous and unnecessary "trade war" he himself instigated was one favored scheme employed by Trump to move the markets higher.

The COVID-19 pandemic and its grotesque mismanagement quickly revealed how rudderless and lacking in any economic logic Trump's stewardship of the economy had been, and Trump quickly relinquished any pretense of formulating policy to the beleaguered Federal Reserve, which responded by immediately using its limited toolbox in cutting interest rates essentially out of existence. Meanwhile, even as tens of millions became suddenly unemployed overnight, while GDP levels precipitously collapsed to levels mirroring the Great Recession of 2008-2009, and while businesses in the retail, travel and hospitality industry shuttered, many for good, the stock market as reflected by the Dow Jones and Nasdaq continued to flourish. With some notably unsettling gyrations, the markets remained relatively stable, creating something Trump clearly had hoped to brag about at Joe Biden's expense.

But markets typically price in the next three to six months of economic activity, and market analysts are perfectly capable of reading political tea leaves. As reported last week by the New York Times, a gradual consensus is emerging on Wall Street that not only is Vice- president Biden highly likely to win the November election, but that the result will be a boost to the financial markets, as opposed to what Trump has been loudly warning about.

As the Times' Matt Phillips reports:

B]eneath the volatility, which reflects investors' reaction to short-term developments, a subtle shift is occurring on Wall Street. Investors and analysts have begun to take into account the possibility that Mr. Trump's time in the White House may soon be over, as Democratic presidential candidate Joseph R. Biden Jr. continues to pull ahead in polls just weeks before the election.

And that is producing some optimism on Wall Street, because many investors believe that the higher Mr. Biden climbs in polls, the lower the chance of a contested presidential election. An election with no clear winner and the fading prospects of another round of stimulus are two of the biggest threats to market stability.

In this regard, Biden's and Democrats' standing with the financial markets has been (perversely) aided by the scorched earth tactics of Republican Senate Majority Leader Mitch McConnell, who has prioritized further damaging an economy he now clearly believes Biden, not Trump, will be handed come January, 2021. McConnell's refusal to negotiate in good faith any fiscal stimulus—even one deemed absolutely essential by both Wall Street and the Fed—has prompted the markets to re-evaluate their misgivings over potentially higher tax rates for the wealthy and stricter government regulation, in light of the boost to the economy a Democratically-passed stimulus promises to provide.

Phillips explains that under the unprecedented stress of current economic conditions, the markets are looking to that stimulus as a lifeline—and they don't care who provides it:

[I]nvestors are of the view that a "blue wave" victory — in which Democrats retain the House of Representatives and retake the Senate as well as the presidency — represents the best chance to get another large injection of federal money into an economy that continues to struggle. Economists and policymakers, including the Federal Reserve chair, Jerome H. Powell, say such assistance is sorely needed, as job growth stalls, layoffs mount and temporary furloughs turn into permanent cuts.

As a result Trump can no longer credibly point to the resilient stock market in support of his own candidacy. The market now believes Trump will lose, and thanks to McConnell, believe that stocks will fare better under a Democratic trifecta in the House, Senate and Presidency. Indeed, as Phillips notes, investors "now see an indisputable win for Mr. Biden and the Democratic Party as the most favorable outcome for the market." So not only are the markets rooting for a Biden and Democratic victory, they are hoping for a blowout, since that will take the any economic uncertainty of a "contested" election out of the picture and ensure that a Democratic House and Senate provide the type of substantial stimulus needed to rejuvenate the American economy.

During this past year, the stock market—whose rewards are not shared by the majority of Americans-- has been strangely and noticeably out of sync with the day-to-day reality being faced by millions. A sweeping Democratic victory on November 3rd now appears likely to serve the interests of everyone—everyone except, perhaps, Mitch McConnell and Donald Trump.

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