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Unchartered Territory


Sen. John McCain (R-Ariz.) announces the temporary suspension of his presidential campaign in September 2008 and his intention to return to Washington to address the financial crisis.

As I write this update, the Dow Jones is up nearly 800 points for the day. It is a good showing in what has been one of the most turbulent 10 days in the market’s history. But the Dow also still is down almost 3,000 points (you read that correctly) from its all-time high, set just three weeks ago on February 11. For the S&P, its more than 11 percent decline since last week has been the fourth-worst weekly performance for the index since World War II.


The Federal Reserve already has cut rates, and members of Congress announced a short while ago that they had put the finishing touches on a bill to provide funding to try to address and contain the coronavirus outbreak. But what else can we expect, both legislatively and politically, from federal lawmakers and candidates for office?


That answer is not easy to determine—precisely because this stock market decline is fairly unique.


In its review of the four biggest stock market declines ever (1929, 1987, 2001, and 2008), TheStreet blames over-leveraged investors or risky investment strategies for the panic. A list of crashes assembled on Wikipedia blame sell-offs on trust-busting, assassination attempts, and war. The Cuban Missile Crisis spurred a mini-bear market during President John F. Kennedy’s tenure—and the most readily available explanation of how the Fed reacted garners only a one-line explanation on Wikipedia. “The Federal Reserve,” it says, “Made only minor interest rate movements, which helped ease panic in the treasury markets.” (Congress did more. To stimulate the economy, President Kennedy asked for a series of tax cuts—and Congress answered by cutting corporate and personal rates.)


But not every downturn was met with such swift action from Washington.


It even seems that the events of Black Monday 1987, when the Dow dropped 22.6 percent in a single day, did not spur much reaction. As Federal Reserve historians tell it, “In a statement on October 20, 1987, Fed Chairman Alan Greenspan said, ‘The Federal Reserve, consistent with its responsibilities as the Nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” (There was one lasting consequence of the 1987 crash, though it didn’t come from policymakers. As the Corporate Finance Institute explains, “In the aftermath of the 1987 crash, stock exchanges worldwide implemented ‘circuit breakers’ that temporarily halt trading when major stock indices decline by a specified percentage.”)


Contrast the Fed’s account of 1987 with what its historians have written about the 1929 stock market crash that led to the Great Depression. In that instance, Federal Reserve historians note, “The New York Fed sprang into action. It purchased government securities on the open market, expedited lending through its discount window, and lowered the discount rate. It assured commercial banks that it would supply the reserves they needed.” President Franklin Roosevelt also called for—and got Congress to agree to—massive stimulus policies.


There is another difference between 1987 and 1929.


As the Fed’s historians also note, “Stock markets quickly recovered a majority of their Black Monday losses.” In fact, in just two trading sessions the Dow “gained back 288 points, or 57 percent, of the total Black Monday downturn. Less than two years later, US stock markets surpassed their pre-crash highs.”


Those numbers are similar to what we have seen from any temporary downturn due to a pandemic scare. Note that none of the stock declines listed above had anything to do with the threat of a global pandemic. We have not seen any health-related sell-off that compares to what we’ve seen over the last week. But there is some historical reason to be optimistic: the stock market not only survived previous threats—it thrived. According to an analysis by MarketWatch, the S&P 500 posted gained nearly 15 percent after the first occurrence of SARS 18 years ago. It was up about 12 percent in the six months after the 2016 Zika scare, and about 19 percent in the six months after the avian flu threat of 2009.


Seeking Alpha believes the closest thing to what we are seeing today was the Spanish Influenza of 1918. And it found, “In a year where the Spanish Flu killed roughly 0.6 percent of the population, stocks had a decent year, producing returns near their long-term average.” (Importantly, the website notes that the public—and, perhaps more importantly, the media—was hyper-focused on the flu threat, explaining “Newspaper publications available in 1918 frequently ran stories about the rising mortality rate and its negative impact on commerce.” People, and presumably investors, were worried.)


According to Seeking Alpha, even the recession that took hold in mid-1918 and early 1919 is not attributable to the flu. The site says the “brief downturn was believed to have been caused by the cessation of wartime production and an influx of labor from returning troops that led to high unemployment.”


Of course, the world economy is much different from it was 102 years ago. Our transportation systems and supply chains are far more integrated, but this viral history might be one reason we have not seen more panic, or stimulus proposals, from Capitol Hill yet.


The threat of coronavirus also does not seem to have slowed the pace of the Election 2020. (In fact, perhaps the ongoing campaigning has been good for it—it is, after all, at least somewhat notable that Dow futures started to improve last night as Super Tuesday results were coming in and were showing a Vice President Joe Biden sweep in southern states. The Fed’s rate cut certainly didn’t have that positive impact.)


This is, of course, in direct contrast to September 2008. At that moment, a two-term incumbent president was preparing to leave office so was (relatively) undistracted from the need to calm investors, Americans, and the world. But Sen. John McCain (R) and Sen. Barack Obama (D) were locked in a battle to succeed him.


According to National Public Radio, early on September 24, 2008 it appeared both senators would suspend their presidential campaigns and get back to Washington, D.C. to try to shepherd an economic stimulus bill through Congress. Sen. Obama reached out to the McCain camp to suggest a joint statement about suspending their respective campaigns. Sen. McCain did not take that initial call, continuing to meet with staff instead. The two candidates finally talked later that day and, in the evening, released a statement that said nothing about a suspension in campaign activities. Instead it noted, “This is a time to rise above politics for the good of the country. We cannot risk an economic catastrophe. Now is our chance to come together to prove that Washington is once again capable of leading this country.”


The next morning, however, Sen. McCain announced in a speech at the Clinton Global Initiative that he could not “carry on a campaign as though this dangerous situation had not occurred, or as though a solution were at hand …” He got on a plane back to Washington, D.C. while Sen. Obama continued to campaign.


And, of course, Sen. Obama went on to win the election just a few short weeks later.

While we might not know much about the coronavirus, what the Fed or Congress will do next, or how sustained stock market losses will be, we do know this: it is not likely that Sen. Bernie Sanders or former Vice President Joe Biden will emulate the McCain campaign of 2008. President Donald Trump has the bully pulpit (and Twitter) and Democratic candidates cannot afford to go silent.

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