- President Trump has been reacting irrationally to every minor stock market correction.
- His reaction suggests the stock market is in trouble, and a big crash is looming.
- Lack of buying combined with the presence of high frequency trading systems make a 1987-style implosion a possibility.
President Donald Trump has been pumping the stock market ever since he took charge of the White House. Despite calling it a “big, fat, ugly bubble” in a presidential debate, he’s been blowing air into the same bubble relentlessly.
Although President Trump is a big proponent of investing in stocks now, he’s willingly ignoring basic facts about the markets: Crashes and corrections are part of a stock market. Nothing goes up in a straight line. If stocks only went up, the markets would cease to function.
President Trump is Afraid of a Stock Market Correction
Lately, any sign of a market correction has been making Trump uncomfortable. For instance, following the 1,000-point drop in the Dow Jones on Monday, he made a desperate attempt to calm Wall Street by tweeting this from India:
His director of National Economic Council, Larry Kudlow, wasn’t as subtle as he outright advised investors to buy the dip.
Their advice backfired severely. Just hours after the tweet, the CDC confirmed that a widespread coronavirus outbreak in the U.S. was inevitable. Consequently, Dow Jones futures tanked, and the markets crashed further the next day.
Trump made another embarrassing attempt to pump the stock market, though. On Tuesday, before the opening bell, the president said that the U.S. is very close to finding a vaccine for coronavirus. The claims were later shot down by the White House.
Stocks are barely down 10% from the all-time highs. Yet, the plunge reportedly infuriated Trump.
This begs the question: Why is he so afraid of a stock market correction? Does he know something we don’t?
Is the Trump Administration Worried about an Implosion?
President Trump has touted the performance of the stock market ever since he came to the Oval Office. So it’s understandable that he’d want the market to be as high as possible to increase his reelection chances.
But his reaction to any minor market dip is not reasonable. He could easily blame a 10% or 20% correction on the rising popularity of a borderline-communist candidate in Bernie Sanders.
The only logical explanation for this is that he believes the stock market is fragile and at risk of imploding. In an investing world dominated by high frequency trading (HFT) algorithms, a brutal flash crash is always a possibility.
In an interview with CNBC, billionaire investor Mario Gabelli even said that Tuesday’s plunge reminded him of the Black Monday:
It reminds me of 1987, and it’s an area where everyone is going to try to get out of the exit door and it’s going to be very narrow.
Is the Stock Market Running Out of Buyers?
A 1987-like crash becomes more likely when there’s a lack of people willing to buy stocks. Several data points suggest that the market is indeed running out of buyers. For instance, company insiders have been dumping shares at a record pace.
Buybacks have been vital to the U.S. stock market’s performance since the end of the Great Recession. U.S. corporations have been the biggest buyers of their stock since 2008. But, lately, even the buybacks have slowed down.
It seems like the only thing supporting the stock market has been a flurry of new retail buyers.
An increase in retail buyers is an ominous sign since it often coincides with market tops. Retail investors are the ones who arrive last to the party and are left holding the bag when the market crashes.
The lack of buyers is troublesome for the stock market and can lead to brutal flash crashes. A shortage of buyers combined with the increasing presence of HFT systems and overstretched valuations make a 1987-style crash a real possibility.
Maybe this is why the Trump administration was considering a tax incentive for Americans to buy stocks.