President Trump’s positive COVID-19 test will likely create substantial turbulence within financial markets. We should expect much higher than normal volatility in equity prices and possibly interest rates while the president and the first lady quarantine, because their COVID test results create new economic and political uncertainty, and uncertainty almost always roils financial markets.   

This development creates enormous uncertainty on many fronts, some of which we have not seen before in modern times around a major election. The most important source of uncertainty is the president’s health and his current and potential symptoms. Even if the president has only mild symptoms, he will need to remain quarantined for about 14 days. This means that the second presidential debate with Democratic presidential nominee Joe BidenJoe BidenState Department revokes visa of Giuliani-linked Ukrainian ally: report Biden says he should not have called Trump a clown in first debate Biden inquired about calling Trump after coronavirus diagnosis MORE will need to be rescheduled. This also means that Trump will not be able to campaign for some time.

Should the president become significantly symptomatic, then the duration of his quarantine will become longer, depending on the severity. If his symptoms became severe, and he is unable to discharge the duties of the presidency, then it is possible that Vice President Pence may become acting president until the president is able to return. The first lady’s health is also a concern and may also impact the president’s ability to campaign or travel should she become significantly symptomatic, even if he is not.

Unfortunately, history of prior presidential emergencies provides little guidance for predicting the future course of financial markets. One reason is that stock markets were closed for a period after the President Kennedy assassination in 1963, and also after the 1981 attempted assassination of President Reagan to prevent panic selling and speculation.

Another reason is that today’s financial markets are light years different from those in years past, reflecting huge changes in technology, global trading and regulatory changes that affect trading and the financial products that are offered. And to top this off, Trump’s test result is occurring about a month before the election and while the world economy is trapped within a pandemic-induced recession. At the close of market trading on October 2, the S&P 500 index declined by about 1 percent, while its volatility index increased by 3.5 percent, reflecting increased uncertainty.

This uncertainty could rise further depending on the course of the president’s symptoms, and this in turn can potentially affect voters and voter survey results in different ways. The president has had a lightning rod presidency. There are a group of voters absolutely devoted to his reelection, and another group who are vigorously opposed. Beyond the two extremes is a large group of independent voters. Now roughly 40 percent of the electorate, independent voters will play a critical role in this election, much as they did in 2016. The president’s positive test and the potential course of symptoms may cast the president in a different light with voters, potentially creating more sympathy for his candidacy. Alternatively, the suspension of his campaign means that voters will receive less information about his policy vision over a possible second term. This could hurt the president’s reelection chances.

Stock market performance has been one of the hallmarks of Trump’s presidency. Between his 2016 election, and the market close on October 1, 2020, just before his test result was announced, the S&P 500 Index rose about 56 percent.

Prior to COVID-19, this remarkable performance reflected a booming U.S. economy that in turn was being driven by rapid worker productivity growth and a corporate tax reform that lowered the U.S. corporate rate to be competitive with corporate rates in Europe.  Unemployment was at its lowest level since the 1960s, and unemployment among African Americans and Hispanics was at an all-time low.

As we learn more about President Trump’s condition, uncertainty ultimately will be resolved, and market volatility will decline. Before COVID-19, the future of the American economy looked exceptionally bright, and some of Trump’s policies had contributed to that success. But after COVID, the next president will confront an economy with a debt-to-GDP ratio exceeding 100 percent, a level not seen since World War II. Moreover, our next president will also need to address a demographic freight train that is rapidly approaching in which the Baby Boomer generation will be retiring in greater numbers, drawing on more Social Security and more Medicare resources, which in turn will need to be supported by a smaller pool of workers.

These fiscal factors alone ultimately mean higher taxes, which in turn may well be bad news for the stock market. It will be a bumpy stock market ride between now and the election, but the bumps may turn into a negative trend depending on just how much more government spending will be coming our way after November.

Lee E. Ohanian is a senior fellow at Stanford’s Hoover Institution and a professor of economics at UCLA.

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