After another night of protests and riots across the U.S., President Donald Trump has warned state governors to quell unrest or he will send in the military.
At least outwardly, investors look calm, with stock futures in the black. With the S&P 500 and Nasdaq up 36% and 39%, respectively, from Mar. 23 lows, the question is how long gains can continue against a backdrop of unrest?
Our call of the day, from Tim Duy, an economics professor at the University of Oregon, warns that stocks may run into trouble if we see troops on the streets of America.
“The best-case scenario is that the riots soon revert to continuous, massive, but peaceful protests. The worse-case scenario is that President Donald Trump acts on his threat to use military force to end the riots,” writes Duy in his influential Fed Watch blog.
“Aside from the obvious additional damage to the nation’s social fabric, widespread use of military force domestically would I suspect inflame the situation further, worsen consumer activity, and slow the progress of recovery,” he says.
What’s more, Congress would divide further, possibly delaying the next fiscal support bill — analysts see another one coming by July. That is as large crowd gatherings and closed testing facilities have triggered concerns over a surge of COVID-19 cases in weeks to come, possibly hampering reopenings, he adds.
While more aid to counter the pandemic fallout, alongside continued supportive action by the Federal Reserve, offers a decent setup for financial markets, Duy says that story “feels more vulnerable this week.”
“Needless to say, widespread military action against U.S. citizens coupled with a resurgence in COVID-19 cases would be…bad. The psychology could turn against equities quickly, just as it did in March,” he says.
This article originally appeared on MarketWatch.
