Rollercoaster Week on Wall Street Finishes With a Slump

MANHATTAN (CN) — What started with a bang, with a massive two-day rally, ended with a whimper as U.S. markets petered out Friday.

Coming off a 1,000-point gain earlier this week, the Dow Jones Industrial Average opened to a 130-point loss on Friday, with losses mounting as anxious investors awaiting news from the White House were given only a single morning tweet from the president: “CHINA!”

By the time President Trump delivered his remarks in the White House Rose Garden, the Dow shaved another 150 points off its total. The S&P 500 and Nasdaq remained in positive territory, posting gains of about 0.5% and 1.3%, respectively, while the Dow finished the day down only 17 points.

During a press conference in which he answered no questions from the press, President Trump repeated his mantra that China is responsible for spreading the coronavirus and ignored reporting obligations to the World Health Organization.

“The world needs answers from China on the virus,” Trump said.

The Trump administration will officially terminate its relationship with WHO and redirect those funds to “other public health need,” Trump said, noting he may impose individual sanctions on individual officials in the People’s Republic of China and Hong Kong.

Tensions between the countries were already on the rocks over the handling of the Covid-19 pandemic, but relations got worse on Thursday when China’s congress approved its proposal to impose new security laws banning secession and foreign interference in the territory. 

The new law, the text of the which has not yet been made public, grants China broad powers in Hong Kong and threatens to end the “one country, two systems,” policy that has been in place since 1997. That policy recognized Hong Kong as part of China but allowed the city to keep its own administrative systems and capitalist economy.

China “broke their word” on the autonomy on Hong Kong, Trump said Friday, calling the new security law a “tragedy for people of Hong Kong, the people of China, and indeed the people of the world.”

In response, the White House will begin to eliminate policy exemptions for Hong Kong, from extradition treaties to export controls and the use of duel-use technologies. “Our actions will be strong, our actions will be meaningful,” Trump said. 

The United States already has taken several steps to try to rein in China, including adding two dozen foreign companies to its “Entity List,” which prohibits them from exporting or transferring certain items, scrutinizing four state-controlled telecommunications companies, and proposed expelling Chinese graduate students with ties to China’s military.

Trump did not mention any change in trade between the United States and China, but some analysts worry new measures could scuttle the Phase One trade deal reached in February. In that deal, China agreed to purchase an additional $200 billion in products from the United States, though it is almost certainly not going to be able to meet that threshold.

“When it’s all said and done, I think that the increasing tensions with China are an even bigger risk to the stock market and the economy than the pandemic,” Tulane University finance professor Peter Ricchiuti said in an email. “Tariffs are prosperity killers and they always have been.”

The tariffs imposed on Chinese exports already hurt the U.S. economy, according to a research paper by New York Federal Reserve Bank economists posted Thursday. The 2018 trade war reduced U.S. investment growth by 0.3% by the end of 2019, and likely will reduce growth by another 1.6% off by the end of this year, the study found.

Investors may have been somewhat cheered by calming statements from Federal Reserve Chairman Jerome Powell on Friday, who assured former Fed Vice Chairman Alan Blinder during a webcast that the central bank’s Main Street Lending Program will kick off in a matter of days.

The program, which will issue loans of $500,000 to $200 million to small- and medium-sized companies ravaged by the Covid-19 pandemic, was part of the $2.2 trillion stimulus package passed in March. 

“It is far and away the biggest challenge” of all the lending facilities the Fed has set up, Powell said, noting that the term sheet for the program has been altered since its inception.

Powell also noted that, while investors should be braced for the ramifications of a second outbreak of Covid-19 later this year, the Fed would be able to tackle such a problem.

“We are not close to any limits that we might have,” Powell said, remarking that a flare-up of coronavirus would be more damaging to consumer confidence than to market liquidity. “A second wave would really undermine public confidence and might make for a longer, a significantly longer recovery and a weaker recovery,” he said.

But Powell noted the central bank needs to “stay in its lane,” which is linited to providing lending, and once again urged Capitol Hill to handle the issue of grants or fiscal relief. “That is a job for elected officials who control spending and taxation, it is not a job for appointed officials like us,” he said.

The up-and-down market this week shows that the U.S. economy can “have a ‘roaring 20s’ after this pandemic just as we had after the 1918-1919 Spanish flu pandemic,” Robert Hockett, a banking and finance professor at Cornell University who has done work for the New York Fed, said in an email.

“It will be crucial, however, to avoid far worse ‘second’ and ‘third waves’ after this one,” he said. “And thus far, Trump shows no evidence of planning or even a capacity to plan.”

The United States received a grim reminder of the first wave of Covid-19 on its citizens earlier this week, when the number of deaths attributed to the virus officially topped 100,000. According to data compiled by Johns Hopkins University, 5.8 million have contracted Covid-19 worldwide and more than 362,000 have died. In the United States, 1.7 million have contracted the disease nationally and 102,000 have died.

Follow @NickRummell

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