When the opening bell sounded at the New York Stock Exchange on Thursday morning, new coronavirus infections were rising in at least 20 U.S. states. In Texas, hospitalizations for COVID-19 had just hit a record high for three consecutive days; in Arizona, confirmed cases had risen by an average of more than 1,000 a day. Meanwhile, another 1.5 million Americans had filed initial jobless claims, as the official unemployment sat above 13 percent (while the actual unemployment rate was likely closer to 16), and analysts were warning that a second wave of layoffs — this one inundating white-collar workplaces — was about to crest. Major U.S. companies were declaring bankruptcy at a rate unseen since the Great Recession. Nearly half of all commercial rents were going unpaid. It was unclear how the giant morass of unpayable financial obligations strewn throughout the private sector would be resolved, even if the worst of the pandemic were behind us — and with no clear basis for dismissing the possibility that the worst was yet to come.
And the S&P 500 was about as highly valued as it had been when the year began — back when the coronavirus pandemic was still a far-fetched hypothetical.
All of which is to say: There is an abundance of rational explanations for why U.S. stock prices tumbled Thursday afternoon, with the Dow Jones declining by nearly 7 percent, the S&P by nearly 6 percent, and the NASDAQ by more than 5 percent.
Alas, the White House’s preferred explanation is not one of them.
According to the Trump administration’s top economic advisers, Thursday’s volatility was not born of fears that economic reopenings are fueling new coronavirus outbreaks, or a sudden, collective recognition that the market’s extraordinary rally was premised on a set of economic and public-health assumptions with little empirical basis. Rather, stocks fell because Federal Reserve Chairman Jerome Powell does not smile enough.
“I do think Mr. Powell could lighten up a little when he has these press offerings,” National Economic Council Director Larry Kudlow said Thursday. “You know, a smile now and then, a little bit of optimism. I’ll talk with him, and we’ll have some media training at some point.”
Peter Navarro sounded similar notes in an interview with Yahoo Finance. “What I would say is that Jay Powell and his remarks yesterday, I think probably the worst bedside manner of any Fed chairman in history. You think the best strategy for Jay Powell going forward would simply to provide the data and let us know where interest rates are going and keep his mouth shut,” the White House trade adviser said. “I mean, there’s the old joke — I’m an old business professor — and the old joke in the marketing thing is, if Jay Powell was going to market sushi, he’d sell it as cold, dead fish.”
Trump was similarly displeased with the central bank head’s Wednesday remarks.
To be fair to the administration, it’s more than plausible that Powell’s analysis of the economy played a major role in moving the markets. But the Fed chair’s demeanor was (almost certainly) less salient than the substance of his comments, which acknowledged a variety of plain facts about the economic outlook that investors had been blithely ignoring.
Specifically, Powell noted that there is no reason to believe that the economy will spring back to full employment in the near or medium term, even if one makes the rosiest of public-health assumptions. The pandemic has already produced too much economic damage — and too many shifts in investment and consumption patterns — to avoid widespread business failures. Millions of jobs that existed four months ago will not be coming back. Reemploying the workers who held those positions will require creating millions of new jobs, a process that could take years.
For this reason, the central bank expects the U.S. unemployment rate to remain above 9 percent at the end of this year, before falling to 6.5 percent by the end of 2021 and 5.5 percent the following year. This is actually a more optimistic forecast for employment than one the Congressional Budget Office produced earlier in the pandemic. But the Fed forecast is also ostensibly incompatible with a “V-shaped” economic recovery — which is to say, a recovery as sharp on the way up as it was on the way down — which investors had apparently been banking on for reasons that are difficult to understand.
It is possible that investors’ souring mood will ultimately redound to the real economy’s benefit. After the better-than-expected May jobs report, many congressional Republicans began voicing skepticism about the need for extending unemployment insurance benefits and other forms of economic relief despite the fact that such transfers single-handedly averted a sharp decline in U.S. household income last month. But when owners of capital see the value of their property decline, Mitch McConnell’s caucus tends to lose its appetite for laissez-faire.