The latest bloodbath on Wall Street is overwhelming the Trump administration's resistance to an emergency stimulus aimed at heading off a coronavirus-induced recession.
The questions now are whether it will be big and effective enough to do that job, and whether the Trump administration can secure congressional support for it.
The economic stakes could hardly be higher. The Dow Jones industrial average just shed 7.8 percent, its worst single-day decline since the financial crisis. Stocks are now nearing bear market territory, having sustained an almost 20 percent decline from highs just last month; oil prices fell 24 percent, their worst day since the 1991 Gulf War; and the yield on the 10-year Treasury bond fell below 0.4 percent, a new low.
Taken together, those results spell an unmistakable verdict from investors: They now expect a recession. A growing chorus of economists agrees, projecting a downturn that would kick the legs out from President Trump’s central argument for his reelection. (Moody's Analytics chief economist Mark Zandi says a global recession is now “more likely than not.”)
Against that swiftly darkening backdrop, Trump announced Monday night that his administration is assembling a relief package to sustain dislocated workers and keep businesses afloat. He said it will include a payroll tax cut and help for hourly workers, including a short-term expansion of paid sick leave.
And he is also looking to provide assistance to the hospitality industry, which has been hammered as Americans cancel travel plans because of virus fears. But Bloomberg News reports the administration so far has decided to leave that out of the relief package. The administration is set to spell out more details at a news conference today.
“Trump’s comments made clear that the White House is now considering a huge and expensive government response,” my colleagues Jeff Stein and Erica Werner report. “Just a one percentage point reduction in the payroll tax would cut between $55 billion and $75 billion in revenue, according to a recent projection from the Committee for a Responsible Federal Budget.”
The White House announcement appears to be buoying investors, with U.S. stock futures pointing to a bounce back today. Per the Wall Street Journal: “Futures tied to the Dow Jones Industrial Average jumped 4.2% Tuesday, suggesting U.S. stocks may claw back some lost ground after the blue-chips index posted its biggest fall since 2008.”
The administration's move also marks a turnaround in just a matter of days. While Trump had floated the idea of a payroll tax cut, the president and his top economic advisers had placed the burden on the Federal Reserve for backstopping the economy. Larry Kudlow, Trump’s top economic hand, as recently as Friday pooh-poohed a big fiscal response, arguing such packages “have never really worked in the past.”
The administration can’t take congressional support for whatever it proposes for granted. House Speaker Nancy Pelosi (D-Calif.) and Senate Minority Leader Chuck Schumer (D-N.Y.) outlined their preferences Sunday, calling for paid sick leave, enhanced unemployment insurance, expanded food stamp benefits, and “widespread and free” coronavirus testing and reimbursement for care not covered by insurance.
House Democrats are set to hear on Wednesday from Jason Furman, who served as President Obama’s top economist, and Claudia Sahm, a former Fed economist who specializes in recessions. Both have called for a fiscal major fiscal response — Furman is ballparking the price tag at $350 billion. And both say the benefits must be tailored to make an impact quickly for the most vulnerable, a mark they say a payroll tax cut misses.
“It would be too slow and dispersed to substantially stimulate the economy, as households would receive only a modest benefit every pay period,” Furman wrote in the Wall Street Journal last week. “The distributional effects are worrisome as well: A one-year payroll tax cut of 2% of income would provide up to a $5,508 tax cut to a high-income couple, only $500 to a single parent getting by on $25,000 a year, and nothing for a worker placed on leave without pay. This isn’t the fairest or most efficient way to increase aggregate demand.”
Senate Finance Committee Chairman Chuck Grassley (R-Iowa) is considering “targeted tax relief measures,” a spokesman said, though it is not clear what those include. Some of his fellow Republicans are less interested.
From my colleague Bob Costa:
lots of unease tonight among congressional Rs about even considering a temporary payroll tax cut amid virus fears and market drop... esp in Senate.— Robert Costa (@costareports) March 9, 2020
But targeted tax breaks won't be an easy sell, either, I'm told. While most Rs would fall in line, some conservatives would balk.
From CNN’s Manu Raju:
John Cornyn, a member of Senate GOP leadership, has little appetite at this point for tax cuts aimed at spurring economy. “I usually love tax cuts but I think it’s a little bit premature.”— Manu Raju (@mkraju) March 9, 2020
It’s also fair to question whether Trump’s definition of a major intervention will meet that of independent economists basing their projections on the size of the demand shock now facing the economy.
Indeed, the president and his top aides continue projecting optimism that the coronavirus will prove only a short-term and limited drag on the economy in the face of evidence to the contrary.
“Trump has spent much of the past four days tending to campaign benefactors and preoccupied with his own political future,” the Post's Phil Rucker, Bob Costa, Ashley Parker and Josh Dawsey report. “He has used those settings to complain about what he considers to be coronavirus hysteria in the media and overreaction by financial markets. ‘It’s not that big of a deal,’ Trump said at one of the events, according to people who heard the comments.”
That comes even as Trump himself remains just a few handshakes away from the virus. Three House Republicans, including Mark Meadows, the president’s incoming chief of staff, all of whom have had contact with the president in recent days, announced Monday they are quarantining themselves after learning they interacted with an infected person at the Conservative Political Action Conference.
Trump officials nevertheless say victory is just around the corner. “The President is 100 percent committed that we will provide whatever tools we need, that the economy will be in very good shape a year from now,” Treasury Secretary Steven Mnuchin said at the Monday evening press conference. “This is not like the financial crisis where we don't know the end in sight. This is about providing proper tools and liquidity to get through the next few months.”
The comments drew a rebuke from Larry Summers, a predecessor of Mnuchin’s at the helm of Treasury. “For the Secretary to suggest it’s all at hand is to put his credibility at some risk, and I don’t think people in positions of responsibility for economic policy should ever try to be definitive about what economic outcomes are going to be,” Summers said in an interview on CNN’s “Out Front.” “Frankly, it suggests they're more politically motivated than analytically motivated for the benefit of the economy.”
Summers, who helped craft the 2009 stimulus package in the teeth of the financial crisis, said there is now “much more danger that we will do too little than we will do too much.”
Jay Shambaugh, director of The Hamilton Project at the Brookings Institution, tells me the fiscal package should carry a price tag of between $200 billion and $300 billion. He would direct that money to cover immediate public health needs; expanded federal assistance for state health care programs; more generous food stamp and unemployment insurance policies; and sending checks to Americans directly to help meet surprise expenses and goose spending.
Considering how low the yield has fallen on longer-term U.S. debt, “the market is begging the government to borrow money,” Shambaugh says. “Take out some insurance against big downside risk. If it turns out we didn’t need it, it’s not the end of the world. We’ve just put some money back into the hands of Americans.”
— A very bad day on Wall Street. The Post's Heather Long, Thomas Heath, Will Englund and Taylor Telford: "The losses were so deep on Monday that the stock market nearly fell into a bear market, which would have meant the official end of the 11-year bull market run of rising stocks that began on March 9, 2009. So far, the Dow has lost more than 19 percent since its mid-February record high. A 20-percent drop from the all-time high would earn the bear market moniker, an important psychological change for investors.
"Minutes into the opening of the New York Stock Exchange on Monday, stocks had fallen so much, so quickly that they tripped the so-called “circuit breaker." That hasn’t happened since 1997, and it immediately forced a 15-minute brake in trading on the hopes that investors would re-asses. When the timeout ended, stocks barely budged, staying at low levels all day."
If stocks fall into a bear market soon, it would mark a record-fast descent, per Ritholtz Wealth Management's Josh Brown:
Back to 1915, the average amount of days it’s taken for stocks to fall into a bear market from a peak is 255.— Downtown Josh Brown (@ReformedBroker) March 10, 2020
Dow Jones is now down 19% - seventeen days from an all time high to an almost bear market (we’ll see).
New record. https://t.co/lAWmPlklZs @michaelbatnick
— Crude oil prices are cratering:
Trump framed this as a consumer-friendly development:
Good for the consumer, gasoline prices coming down!— Donald J. Trump (@realDonaldTrump) March 9, 2020
But in addition to helping drive the stock selloff, the collapse in oil prices in a net negative for economy. Oxford Economics writes that consumers would likely pocket any savings, amid the uncertainty induced by the coronavirus. And energy companies would stop investing in their operations, shaving 0.2 percent off of GDP growth this year. Worse, “the decline in oil prices could trigger a large sell-off in energy-related high-yield bonds and elicit a wave of downgrades and defaults that could spread to other segments of the credit market."
The Post's Steven Mufson and Will Englund have more on the implications of the oil price war here.
— White House to meet with Wall Street CEOs. The Post's Bob Costa and Jeff Stein: "White House officials have invited top Wall Street executives to meet this week as the coronavirus outbreak creates enormous strains on the U.S. economy, according to two people with knowledge of the meeting.
“The gathering comes amid extreme volatility in financial markets. Stocks have fallen sharply in the past two weeks, many investors are seeking safe haven in U.S. government debt, and the oil market has tumbled. The White House’s agenda for the meeting and its list of invited Wall Street executives could not be learned.”
CNBC's Wilfred Frost:
I can confirm that the White House meeting with bank CEO's will be on Wednesday at 3p ET. The nation's biggest 7 banks have all been invited - maybe more too. I know at least 2 will send their CEO - I imagine all (other than JPM) will do so. Some industry bodies like ABA invited.— Wilfred Frost (@WilfredFrost) March 9, 2020
- Regulators urge banks to keep credit flowing. CNBC's Jeff Cox: “In a joint statement issued after the market close Monday, multiple agencies said they will work with banks to ‘provide appropriate regulatory assistance’ to financial institutions under their supervision in meeting financial needs.”
- SEC asks D.C. employees to work from home. The Post's Renae Merle: “The Securities and Exchange Commission on Monday asked employees at its D.C. headquarters to stay away from the office because of a potential coronavirus case, becoming the first major federal employer to turn to telework to avoid the spreading virus.”
- Regulator seeks approval for home trading. “A U.S. regulatory body on Monday said it would temporarily waive some of its rules in order to allow thousands of traders to operate from home as the coronavirus spreads in New York,” Reuters's Pete Schroeder and Michelle Price report. “The Financial Industry Regulatory Authority (FINRA), the self-regulatory body which oversees brokers, said traders could work remotely and recognized that firms may need to implement alternative supervisory systems to make that possible.”
— Fed moves to keep funding markets operating smoothly. WSJ's Nick Timiraos: "A global market rout could force the Federal Reserve to update its 2008 crisis playbook to prevent sharp market dislocations from turning any economic shock from efforts to contain the novel coronavirus into a full-blown recession.
“The central bank took an initial step Monday to keep short-term funding markets operating by boosting the size of short-term lending operations, shelving its plans to gradually pare those offerings. The New York Fed said it would boost the amount of short-term lending it conducts on a daily and biweekly basis to satisfy rising demand from financial institutions and avoid further strains as U.S. banks and businesses prepare for greater disruptions from the coronavirus epidemic.”
— Buildup of risky corporate debt looms. NBC's Gretchen Morgenson: "The coronavirus is threatening the global economy and financial markets. But so is another, less obvious peril — the mountain of risky debt issued by companies and bought by investors during the recent economic expansion. Paying back this debt is going to be tough for businesses that have issued it if their earnings fall because of the coronavirus. Delinquencies, defaults and investment losses are likely, analysts say, possibly subjecting the economy to what economists call a negative feedback loop.
"United States debt levels are at record levels and markets for riskier debt — such as high-yield corporate bonds — have been flashing warning signs. Buyers of riskier debt are also withdrawing from the markets, analysts report… United States nonfinancial corporate debt outstanding stood at $10.1 trillion in the third quarter of 2019, up from $7.1 trillion in 2013, according to the Federal Reserve Board."
More on the coronavirus response in the United States:
- Grand Princess passengers began disembarking: “The first step in an unprecedented domestic operation that will require medical care and the quarantining of more than 3,000 people who may have been exposed to the novel coronavirus,” my colleagues Reed Albergotti, Faiz Siddiqui and Mark Berman report from Oakland, where the cruise ship pulled into port.
- Containment efforts are running up against the reality of sick leave: There are “the legions of low-wage workers who lack paid sick leave but often feel compelled to show up even when they are showing symptoms. Experts have a name for this phenomenon: ‘contagious presenteeism,’” my colleagues Abha Bhattarai and Peter Whoriskey report.
- Colleges and universities are beginning to announce shifts to virtual classes: “Amherst College students will be expected to leave campus by next Monday, the private liberal-arts college in Massachusetts announced, as the school switches to online instruction in an attempt to slow the spread of coronavirus,” my colleagues Susan Svrluga and Nick Anderson report. “Classes at Princeton University will be held online and students are being encouraged to consider staying home after spring break, the school’s president announced.”
- The San Antonio mayor is fed up with the federal government: “As the Grand Princess cruise ship prepared to offload more sick and exposed passengers …, San Antonio Mayor Ron Nirenberg was bracing for a third set of evacuees — and losing patience with a chaotic federal evacuation and quarantine process that he fears is endangering residents,” my colleagues Arelis R. Hernández and Neena Satija report from Texas. “'It’s disconcerting,' said Nirenberg (D). ‘Throughout the course of this, what I’ve seen is that the lack of coordination at the highest levels of this president’s administration is simply stunning.’”
- Bank shares were slammed: “Shares of U.S. banks sharply underperformed the broader stock market … as investors bet tumbling interest rates would crush bank profits and worried about rising credit costs in the face of an economy spooked by coronavirus and plunging oil prices,” Reuters's Sinéad Carew and Elizabeth Dilts Marshall report.
- Global fear is causing a crisis for airlines: The virus “has suddenly and unexpectedly created the biggest challenge for the global airline industry since 9/11,” the Wall Street Journal's Alison Sider, Benjamin Katz and Doug Cameron report. “Bookings around the world are falling sharply. U.S. carriers are following Asian and European airlines in cutting flights, grounding planes and enacting draconian cost reductions, such as hiring freezes and unpaid leave. Foreign airlines are looking for help from governments, banks and investors.”
- Hotel owners are also waking up to the struggle: “After weeks of conference cancellations, corporate travel restrictions and cratering stock values, lodging owners are pulling guidance and cutting expenses while the spread of the virus socks hotel demand,” Bloomberg's Patrick Clark reports. “The shift in tone comes after the largest companies in the industry initially pushed the idea that the impact from the outbreak would mainly be confined to operations in Asia.”
- Florida is particularly susceptible to a hit to the cruise industry: The Sunshine State is “a battleground state crucial to the 2020 election campaign and the home base for the nation’s biggest cruise companies,” my colleagues Jeanne Whalen, Rachel Siegel, Michael Majchrowicz Jeff Stein and Brittany Shammas report. “The sector supports about 422,000 jobs in the United States, more than a third of which are in Florida, according to the Cruise Lines International Association.”
- Italy expands travel restrictions to entire country: “Prime Minister Giuseppe Conte said that Italy would restrict freedom of movement on a scale unprecedented in a democracy, locking down the entire country — 60 million people — in an attempt to contain the accelerating coronavirus,” my colleagues Chico Harlan and Stefano Pitrelli report from Rome. “If Italy succeeds, a version of its tactics could be used in other countries where cases are multiplying, including across Europe, where cross-border movement is a cherished right for many citizens.”
- Xi visits Wuhan: Chinese President Xi Jinping arrived in Wuhan to inspect ‘epidemic prevention and control’ efforts, state broadcaster CCTV reported," my colleague Adam Taylor reports. “Previously Xi had dispatched the premier and a vice-premier to Wuhan, and analysts were waiting to see when the leader himself would visit, viewing this as a sign that China considered the epidemic was fully under control.”
- Japan is taking price gouging of masks seriously: The country “has criminalized the re-selling of face masks for profit, with offenders facing up to a year in jail or a fine of up to 1 million yen ($9,800) or both, the government said,” my colleague Simon Denyer reports from Tokyo.
— Biden's fundraising gets another big boost: “The architect of President Barack Obama’s 2012 fundraising juggernaut has reached out to more than 700 bundlers in a bid to convince them to back Joe Biden’s candidacy as he rides momentum from his Super Tuesday triumphs,” CNBC's Brian Schwartz reports.
“Rufus Gifford, who was the finance director for Obama’s reelection campaign, sent an email just before Super Tuesday to hundreds of fundraisers who combined to help raise millions of dollars in 2012. Most of the email recipients were on Obama’s national finance committees for both his 2008 and 2012 runs for office, according to Gifford, who spoke with CNBC.”
— Where all Trump's campaign money is going: “Working under the aegis of Jared Kushner, the president’s son-in-law, with the cooperation of Trump appointees at the Republican National Committee, the operatives have consolidated power — and made money — in a way not possible in an earlier, more transparent analog era,” the New York Times's Danny Hakim and Glenn Thrush report.
“Since 2017, businesses associated with the group have billed roughly $75 million to the Trump campaign, the Republican National Committee and a range of other Republican clients … Now, by commanding the party’s repository of voter data and creating a powerful pipeline for small donations, the Trump campaign and key party officials have made it increasingly difficult for Republicans to mount modern, digital campaigns without the president’s support.”
- The Koch brothers were among those left on the outside: “What’s more, the move to consolidate voter data came at the expense of a competing data vehicle developed by the conservative activist Koch brothers, provoking resentment from Koch allies, especially in the Senate. And a fierce pressure campaign to centralize fund-raising on the new platform, a for-profit company that [Trump] branded WinRed, brought dissent from candidates initially reluctant to sign on, as well as competitors who believed they were being pushed aside without a fair hearing.”
— Wells Fargo board members resign after House report: “Wells Fargo announced two of its board members, including its chairwoman, Elizabeth A. Duke, resigned after a scathing House report found the bank’s leaders were slow to address consumer abuse scandals,” my colleague Renae Merle reports.
“Duke and board member James Quigley were featured in a more than 100-page report by the House Financial Services Committee that cited thousands of pages of documents, emails and internal notes to conclude the San Francisco-based bank had not properly addressed its problems. Duke had served on the board since 2016 and was elected chair in January 2018, making her among the highest ranking women in banking. Quigley had been a board member since 2013 and is CEO emeritus at Deloitte, the consulting firm.”
- The new chair: “Charles H. Noski, the former chief financial officer of Bank of America, will become chair of the company’s board.”
- CEO set to testify: Charles Scharf, the bank's new CEO, is set to testify in front of the House Financial Services Committee later this morning. Duke and Quigley were set to testify on Wednesday after the panel's chairwoman, Rep. Maxine Waters (D-Calif.), had called for the pair to resign.
- The resignations surprised some on Wall Street: “Apparently Wells figured that offering the heads of Duke and Quigley was the only thing that would satisfy Waters,” Ian Katz, a financial policy analyst with the research firm Capital Alpha Partners, said in a research note. “This does help Wells’ case that it’s trying to get its house in order.”
— Twitter, Elliot strike truce that lets Dorsey stay: “Twitter Inc. and activist hedge fund Elliott Management Corp. have agreed to a truce that will shake up the social-media company’s board but leave Chief Executive Jack Dorsey in place,” the Wall Street Journal's Corrie Driebusch reports.
“The deal halts what was shaping up as one of the highest profile clashes between an activist investor to oust a founder of a high-profile tech company. The agreement calls for Twitter to appoint two new board members to what was an eight-person board, with a promise to search for a new, third independent director, the company said.”
- The social media giant also agreed to a major stock buyback: “Twitter also has committed to $2 billion in share repurchases — or around 8% of the company’s stock at Monday’s closing price. Twitter shares fell 3% on Monday, according to FactSet, outperforming the broader market. The buyback is to be funded in part by a $1 billion investment from technology-focused investment firm Silver Lake, the social-media company said. Twitter also pledged to deliver growth.”
— Aon strikes the biggest M&A deal of 2020: Aon PLC “agreed to acquire rival Willis Towers Watson PLC for almost $30 billion in stock, the biggest global M&A deal of the year announced on one of the wildest days for markets in recent memory,” the WSJ's Ben Dummett reports.
“The Aon-Willis Towers combination would create a global insurance broker with total annual revenue of more $20 billion and the ability to extract pretax cost and other annual savings of $800 million to help boost profit. The new company will be named Aon, with headquarters in London, and will have a combined market value of around $80 billion.”
Some good coronavirus news from South Korea, where new cases are dropping after the country applied wide testing and strict controls, via economist Adam Tooze:
On current trends it will take South Korea only 3 weeks to get initial spread of COVID19 under control. But that requires exceptionally broad testing and strong mitigation. https://t.co/UUCQvBAUgd— Adam Tooze (@adam_tooze) March 10, 2020
- CFPB Director Kathleen L. Kraninger testifies in front of the Senate Banking Committee for the agency's semiannual report to Congress
- Wells Fargo CEO Charles W. Scharf testifies in front of the Financial Services Committee
- Dick's Sportings Goods is among the notable companies to report its earnings
- The Financial Services Subcommittee on National Security, International Development, and Monetary Policy holds a hearing about how financial systems “facilitate the illicit trade in people, animals, drugs and weapons”
- Dollar General, Gap, Tupperware, Slack Technologies, Broadcom and Adobe are among the notable companies to report their earnings
- The University of Michigan releases a preliminary report on consumer sentiment for March