US Congress passed the much-expected $2-trillion fiscal stimulus package, the largest in the US history, to fight the coronavirus-induced economic slowdown and to halt the heavy bleeding across the financial markets. We don’t have details about how this colossal amount will be spent, but the package certainly involves an expansive aid for a large pallet of the population, ranging from small to big businesses, from direct checks to households, unemployment insurance to tax deferrals to help Americans navigate the shaky waters with minimum financial damage.
Is this package an economic vaccine to the virus? It is too early to tell, but the kneejerk market reaction is rather cheery. The Dow closed Tuesday’s session 11.36% higher, the S&P500 and Nasdaq rallied 9.38% and 8.12% respectively to welcome the stimulus package, along with the limitless asset purchases program announced by the Federal Reserve (Fed) a day earlier.
The combination of historical fiscal and monetary stimuli from the US also fueled the European and Asian indices. FTSE closed 9.05% and the DAX soared 10.98%.
The Nikkei (+7.31%) followed up on the New York gains, as stocks in Hong Kong added 2.78% and those in Sydney bounced 5% as WTI crude consolidated near $25 a barrel.
Activity in European futures hint at consolidation at the open, rather than a correction. US stock futures on the other hand trade nearly flat relative to fluctuations we have seen over the past couple of weeks.
The million-dollar question is, will this optimism last, and how long.
One major issue with these stimuli packages is that they are addictive. The bigger the stimuli, the more investors demand.
But at this point, investors know that the US government and Congress have probably hit the higher limit of whatever support they could possibly mobilize to reverse the investor sentiment. There is probably not more in Trump’s, or Powell’s magic hats, therefore we may be gently approaching the most-expected dip in equity prices. The stress in corporate and mortgage bonds should also start easing from here, as the US government and the Fed has got everybody’s back. Yet who’s got their back?
To assess how well the market recovers, we will be closely monitoring two things: the price volatility and the US dollar inflows.
First, a 5%-10% daily volatility is bad, regardless of its direction. A 10% jump in asset prices is as worrying as a 10% fall. Therefore, a stabilization of market prices near a 1-3% daily range is necessary to restore the investor confidence in the short to medium term.
Then, the slowdown in US dollar purchases should be a positive hint that the fund liquidations are slowing and investors start bringing the pile of cash they are currently sitting on back to the market.
It is worth noting that we still have very little visibility on what may happen in the weeks and months to come. With an almost certain worldwide recession looming, the virus-infected economic data will sour the mood practically on daily basis for at least the first half of the year. In this respect, the preliminary PMI figures released yesterday were cataclysmic for most economies in March, with the services sector which accounts for an overwhelming majority of the developed economies taking an unprecedented hit due to a complete shutdown of activity.
But in the long-term, the equity markets have always recovered from the harshest shocks and came out stronger, at least in terms of pricing, following financial crisis.