Trump’s Covid-19 diagnosis is another market-moving wild card

President Donald Trump’s battle with Covid-19, the most serious health threat facing a sitting US president in decades, is yet another market-moving wild card on Wall Street.

Trump’s shocking diagnosis creates vast uncertainty over everything from the day-to-day operations of the American government and the trajectory of next month’s election to the future of crucial negotiations over providing more aid to the fragile economic recovery.

A man wearing a face mask walks near a TV screen reporting about U.S. President Donald Trump and first lady Melania Trump during a news program with a file image of Trump at the Seoul Railway Station in Seoul, South Korea, Friday, Oct. 2, 2020. Trump said early Friday that he and Melania Trump have tested positive for the coronavirus, a stunning announcement that plunges the country deeper into uncertainty just a month before the presidential election. The Korean letters read: "President Donald Trump and first lady Melania Trump tested positive for COVID-19." (AP Photo/Lee Jin-man)

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“This is a head-spinning new development in a head-spinning year,” Ed Yardeni, president of investment advisory Yardeni Research, wrote in a report to clients Monday.

Initially, word of Trump and First Lady Melania Trump’s positive Covid-19 tests shocked investors, sending US stock futures plunging early Friday. But the Dow finished down just 0.5%, or nearly 135 points, Friday as the White House claimed Trump had just a mild case. The S&P 500 lost 1%.

After US markets closed Friday, it became clear the situation was more serious. Marine One landed at the White House to medevac Trump to Walter Reed.

Over the weekend, the president’s doctors revealed Trump had a high fever and drops in oxygen. Yet doctors also said Trump was feeling well by Sunday and could leave the hospital as soon as Monday.

And then, just before US stock futures began trading Sunday evening, Trump made a highly controversial photo op outside Walter Reed. By Monday, the Dow opened about 200 points, or 0.8% higher.

Trump announced Monday afternoon that he plans to leave the hospital at 6:30 pm.

“I feel better than I did 20 years ago!” he tweeted.

US stocks hit session highs shortly after Trump’s tweet. The Dow finished up 466 points, or 1.7%, on Monday – marking its best day since mid-July.

Some market analysts expressed frustration with the lack of transparency into the president’s health.

“It’s hard to understand what the president’s current condition is because there’s been so much contradictory reporting,” Bespoke Investment Group wrote in a note to clients Monday, “but we can say confidently that his doctors are not holding anything back when it comes to treatment and it would appear this his condition is improving.”

How prior health scares have impacted stocks

History shows that markets tend to swiftly rebound from presidential health shocks.

Since 1919, the Dow has almost always recovered within four days from medical surprises, according to CFRA Research. That includes April 1919, when the Dow dropped 1.5% after President Woodrow Wilson was infected with the Spanish Flu. Likewise, the Dow recovered four days after the 1963 assassination of President John F. Kennedy, a national tragedy that initially caused the market to slide 2.9%.

“The stock market is a barometer of economics, not politics,” Sam Stovall, chief investment strategist at CFRA Research, wrote in a note to clients Monday. “History suggests that the equity markets will not experience a long-lasting fallout from the president’s testing positive to the Covid-19 virus.”

Trump’s diagnosis is the most serious health threat to a sitting president since President Ronald Reagan was shot in 1981. The Dow fell 0.3% after the shooting, but recovered in just one day, according to CFRA.

However, the market has sometimes taken longer to recover.

In 1955, the Dow dropped 10% after President Dwight Eisenhower suffered a heart attack. It didn’t recoup those losses for 75 days, CFRA said. And in 1956, the Dow lost 6.5% after Eisenhower was diagnosed with Crohn’s Disease and didn’t recover for 56 days.

Fragile confidence at stake

One risk today is that Trump’s battle with Covid-19 spooks American consumers, the main driver of the US economy. The president’s infection shows that even the most protected person on the planet is vulnerable to the deadly virus.

“President Trump’s illness and the unprecedented political rancor over the election may be too much for people to bear,” Mark Zandi, chief economist at Moody’s Analytics, wrote in a report Sunday. “If as a result they lose confidence in the recovery and pull back on their spending, investment and hiring, then the recovery will unravel.”

Pedestrians wearing protective masks walk past a vacant store front in San Francisco, California, U.S., on Wednesday, Aug. 5, 2020. California's second round of coronavirus-related shutdowns, among the nation's strictest measures, are already causing pain for the most populous state's labor market and portend a deterioration in the overall U.S. employment picture for July. Photographer: David Paul Morris/Bloomberg via Getty Images

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But the opposite could be true as well. If Trump is able to quickly return to the White House and fully recover from Covid-19, it could deliver renewed confidence to nervous Americans.

The outbreak in the White House could speed up deadlocked talks on providing more stimulus to an economy screaming out for it. In one of his first tweets since being hospitalized, Trump pressed lawmakers to make a deal.

However, three GOP Senators have tested positive for Covid-19, casting doubt on the ability of Congress to get major legislation passed anytime soon. Senate Majority Leader Mitch McConnell announced over the weekend the Senate would halt floor action over the next two weeks, meaning no votes will happen this week or next.

“We continue to believe time – and politics – will prevent a deal before Nov. 3,” Chris Krueger, policy analyst at Cowen Washington Research Group, wrote in Monday note to clients. “Given policy volatility, [it’s] very hard to have any conviction right now.”

The election is less than a month away

It’s likewise difficult to say with certainty what Trump’s health scare means for the race for the White House.

But Democratic presidential nominee Joe Biden continues to hold a significant lead in post-debate national polls. And Trump’s perceived chance of winning reelection has dropped on prediction platforms.

An American flag is displayed on a privacy voting screen at a polling station during a power outage in Manhattan, Kansas, U.S., on Tuesday, Aug. 4, 2020. Kansas Republican voters on Tuesday will resolve a raucous Senate?primary?that includes a congressman preferred by party leaders and a conservative firebrand Democrats want to see win the nomination. Photographer: Doug Barrett/Bloomberg via Getty Images

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For instance, a bettor on PredictIt can pay 38 cents to win $1 if Trump wins. That’s down from 46 cents just before last week’s presidential debate. By contrast, it costs 65 cents to win $1 if Biden wins. That wide gap is a sign that PredictIt users think Biden is a significantly safer bet.

Although a Biden win would raise the specter of higher taxes and regulation (especially if control of the Senate falls to the Democrats), investors have grown less fearful of that outcome. And a clear-cut Biden win would eliminate Wall Street’s nightmare scenario of a contested election.

Ultimately, the bigger impact for the market will be how the election impacts the recovery from the coronavirus recession.

“For now, we believe that the economy will continue to recovery through the end of this year and into next year,” Yardeni wrote, “no matter who wins.”