Stocks drop after Trump calls off talks on economic stimulus

Stocks dropped on Wall Street Tuesday after President Donald Trump ordered aides to stop negotiating with Democrats over another round of aid for the economy until after the election

The S&P 500 index slid 1.4% after having been up 0.7% prior to the president’s announcement, which he made on Twitter about an hour before the close of trading. The late-afternoon pullback erased most of the benchmark index's gains from a market rally a day earlier.

The comments from the president came just hours after Federal Reserve Chair Jerome Powell urged Congress to come through with more aid, saying that too little support “would lead to a weak recovery, creating unnecessary hardship for households and businesses.”

“This isn’t just pushing it off until after the election, this realistically is pushing it off until spring,” Delwiche said. "I don't think this is just a one-day financial markets reaction. This really goes to the health of the recovery.”

The S&P 500 fell 47.66 points to 3,360.97. The Dow Jones Industrial Average dropped 375.88 points, or 1.3%, to 27,772.76. It had been up by more than 200 points. The Nasdaq composite lost 177.88 points, or 1.6%, to 11,154.60. The tech-heavy index had been on pace for a 0.5% gain before Trump cut off the stimulus talks.

Small stocks also fell, but less than the rest of the market. The Russell 2000 index of small-cap stocks gave up 4.67 points, or 0.3%, to 1,577.29.

Stocks had been drifting between small gains and losses for much of the day before gaining momentum into the late afternoon, then Trump’s tweets knocked the market into reverse gear.

Wall Street had hoped that Democrats and Republicans could overcome the bitter partisanship on Capitol Hill and deliver more aid for the economy, which has been punched into a recession by shutdowns related to the coronavirus pandemic. Reports on the economy have been mixed recently, as some areas show a slowdown after extra unemployment benefits and other stimulus earlier approved by Congress expired.

Powell has repeatedly urged Congress to provide additional aid, saying the Fed can’t prop up the economy by itself, even with interest rates at record lows. “The expansion is still far from complete,” Powell said in a speech to the National Association for Business Economics, group of corporate and academic economists.

Without more stimulus, analysts expect that growth will slow significantly in the final three months of the year. Last month, Goldman Sachs slashed its forecast for growth in the fourth quarter to just 3% at an annual rate, down from a previous forecast of 6%, because they no longer expected an aid package to be approved. That would leave the U.S. economy 2.5% smaller at the end of 2020 than a year earlier, even after a large rebound in the July-September quarter.

“You’re going to see quite a significant drag on growth,” said Gregory Daco, chief U.S. economist at Oxford Economics, a consulting firm. It “would really risk a double-dip recession.”

The stimulus cutoff coincides with a slowdown in hiring, as employers added 661,000 jobs in September, the government said Friday. That was down from 1.5 million in August and 1.8 million in July.

Tuesday's selling was widespread, led by technology stocks and companies that rely on consumer spending. Utilities were the only gainers among the 11 sectors in the S&P 500.

A report on Tuesday showed that U.S. employers advertised slightly fewer job openings in August than the prior month. But the number was nevertheless better than economists expected.

Several big challenges lie ahead of markets. Chief among them is the still-raging pandemic, as so clearly illustrated by Trump’s COVID-19 diagnosis and stay in the hospital. The worry is that a ramp-up in infections could cause governments to bring back some of the restrictions they put on businesses early this year, which sent the economy hurtling into a recession.

“We’re on the eve of earnings season and people are reasonably undecided as to whether the correction that started in September has further to run,” said Julian Emanuel, BTIG chief equity and derivatives strategist.

The upcoming election also still means a host of uncertainty about tax rates and regulations on businesses, while tensions between the United States and China continue to simmer.

The yield on the 10-year Treasury note fell to 0.75% from 0.78% late Monday. While that’s still very low, the yield has been generally climbing since dropping close to 0.50% in early August.

European and Asian markets closed higher.

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AP Business Writers Christopher Rugaber and Elaine Kurtenbach contributed.