The Dow Jones Industrial Average rallied more than 1,000 points yesterday after it was announced that President Trump was looking into a plan to implement a $1 trillion stimulus plan to help the economy battle back against the coronavirus.
The Dow closed up 5.2% and the S&P 500 and Nasdaq closed 6% and 6.23% higher.
This comes just one day after the third-worst day ever in Dow history, with the index falling a staggering 2,997 points, or 12.9%.
According to reports, the Trump administration is considering a plan that includes payments being sent directly to Americans.
This lines up with an earlier comment from Treasury Secretary Steve Mnuchin, when he told reporters that the government is considering sending checks directly to Americans in the next two weeks.
“Americans need cash now” he added.
Mnuchin also said that the plan would allow corporations to defer tax payments up to $10 million and individuals can defer up to $1 million in tax payments to the IRS, and that President Trump has approved the deferral of $300 billion in tax payments to the IRS.
This new plan would replace the previously discussed idea of eliminating payroll taxes for both employers and employees as a way to get money into American’s hands via larger paychecks.
At least one former Federal Reserve employee says the $1 trillion proposal simply isn’t enough.
Claudia Sahm, who was the principal economist at the Fed from 2015-17, puts it bluntly:
“They need to go big, and they need to go now. I don’t want to see anything less than $1.5 trillion,” she said Tuesday.
She also says the recession started this month, and it “looks like a very serious one,” that could be “twice as deep” as the Great Recession.
“We can’t stop this recession, but we can buffer as much as possible and what we really gain is on the other side of the recession — the recovery,” she added.
Whatever the final dollar amount of the stimulus plan ends up being, it’s clear that the money will help millions of Americans who are struggling financially during the coronavirus outbreak.
With bars, restaurants, movie theaters and other businesses closing for the indefinite future, tens of millions of workers are out of a job and simply can’t earn an income to pay their living expenses, car payment, student loans, etc.
The very real fear is that an extended closure could mean many of those businesses never reopen, and those workers become unemployed.
Treasury Secretary Mnuchin alluded to this, warning Republican senators that without proactive measures like the $1 trillion stimulus plan to help the economy, we could soon see unemployment rates of 20% and “economic ramifications that are worse than the 2008 financial crisis.”
To put that into perspective, a 20% unemployment rate would be double what the country experienced during the Great Recession and the highest since the Great Depression. It would mean roughly 32 million Americans would be out of a job.
JPMorgan Predicts ‘Bad Recession’; Former Fed Chair Sees ‘Shocking’ Downturn
Jamie Dimon, the head of JPMorgan, says he expects the coronavirus pandemic to include a “bad recession” that could put the country into a situation similar to the 2008 financial crisis.
“We don’t know exactly what the future will hold,” Dimon started. “But at a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008,” he added. “Our bank cannot be immune to the effects of this kind of stress.”
Dimon made the comments in the company’s annual shareholder letter.
The letter went on to say that while the bank came into the crisis well funded, the pandemic continues to progress in “dramatically different” ways compared to anything predicted by the Federal Reserve’s stress test for banks.
The Pandemic and the Economy
Perhaps attempting to ease the shareholders into bad news, Dimon stated that JPMorgan’s earnings “will be down meaningfully in 2020” due to the pandemic. He also warned that in an “extremely adverse” downturn in the U.S. economy, the bank would probably consider suspending its dividend in an effort to preserve capital.
Interestingly, Dimon says regulations placed after the 2008 financial crisis could hinder the bank’s ability to help in future crises.
“As we get closer to the extremely adverse scenario, current regulatory constraints will limit additional actions we can take to help clients,” Dimon said, “in spite of the extraordinary amount of capital and liquidity we could deploy.”
Others at Dimon’s bank are sounding the alarm bells as well.
Mislav Matejka, head of global equity strategy at JPMorgan, warned investors yesterday of a very high likelihood that we experience “a vicious spiral, which is typical of a recession, between weak final demand, weaker labor markets, falling profits, weak credits markets and low oil prices.”
JPMorgan economists are expecting “only a gradual bottoming out in activity” because of this. They predict it to be like the ones that took place after the Great Financial Crisis. These economists also believe that it’s “not a V-shaped one that we see, for example, after natural disasters.”
Recession and Prolonged Recovery
The bank also expects the unemployment rate will climb to 8.5% during the second half of the year. It also predicts that the U.S. GDP will decline by 10%. For comparison, the economy saw a 4% decline during the financial crisis.
“And this is all assuming that the virus is history by June, which might prove significantly optimistic,” Matejka wrote.
“While consensus view still appears to be a quick recovery, recessions tend to linger,” he added. “It took equities on average 18 months to record the final low in the past.”
Echoing JPMorgan’s worries about the potential for a prolonged recovery is former Federal Reserve Chair Janet Yellen.
In a recent CNBC interview, Yellen says the current state of the economy is worse than what the data shows.
She says we are already in an “absolutely shocking” downturn that is not reflected yet in the current data. Additionally, she mentioned that the unemployment rate probably sits closer to 13%.
She also says the economy has contracted “at least 30% and I’ve seen far higher numbers.”
Yellen says she is optimistic the country will experience a “V”-shaped recovery. She, however, acknowledges that the length of time a country remains shut down will dictate the speed of recovery.
“I think a ‘V’ is possible, but I am worried that the outcome will be worse,” she said. “It really depends to my mind on just how much damage is down during the time that the economy is shut down in the way it is now,” Yellen added.
The Fed is Propping Up Bond Prices, Are Stocks Next?
Last Monday the Federal Reserve announced that it would spend nearly $700 billion to buy up Treasurys and mortgage-backed securities as part of its “aggressive action” to soften the impact the coronavirus is having on our economy.
As part of the stimulus package, the Fed also said it would start buying exchange-traded funds (ETFs) that track the corporate bond market. For now, it appears the purchases will be limited to investment grade or highly-rated corporate bonds and won’t include more risky high-yield (or junk) bonds.
It’s the first time that the Fed has directly bought securities in an attempt to add liquidity and jump start a frozen market.
“This will provide much-needed liquidity to the bond market and to ETFs,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA.
Steve Blitz, chief U.S. economist for TS Lombard, says the Fed’s move is helping investors enter and exit a position if needed. “All of this is to make sure that people who want to sell have a buyer. The Fed is taking both sides of the market so people who need to raise cash can do so.”
It’s clear why the Fed prefers to buy corporate bonds through an ETF as opposed to buying bonds in individual companies. With one purchase order, it can impact the bond prices of hundreds of companies at once, as opposed to the time consuming task of identifying, pricing and then buying bonds of individual companies.
By moving into the ETF space and buying up bonds, the Fed may also be trying to calm a part of the market that has seen record outflows over the last few weeks. Just two weeks ago, the iShares iBoxx $ High Yield Corporate Bond ETF saw a $1.2 billion outflow, or roughly 8% of it’s total value.
The question becomes, if the market continues to slide as the coronavirus outbreak batters the economy, would the Fed extend its reach and start buying stocks via index ETFs?
It’s an unprecedented move, but then again so was buying bond ETF a little over a week ago.
It would allow the Fed simultaneously impact the stock price of hundreds of companies at once. With the SPDR S&P 500 ETF, the Fed could move the stock price of all S&P 500 companies with a single purchase.
The same would apply for all broad index ETFs like the Dow Jones Industrial Average (DIA) and Nasdaq (QQQ).
Vincent Reinhart, chief economist and macro strategist at BNY Mellon Asset Management, says it could be in the Fed’s playbook.
“Other central banks have done it. It’s the ETF route that the Bank of Japan has taken. I would not rule out them doing equities.”
Lindsey Bell, chief investment strategist at Ally Invest added “We’ve seen the Fed show that they’re willing and able to do whatever it takes to make sure the markets are opening in an efficient manner. They’re taking whatever steps they can. That would be new territory for the Fed, not that they’re scared of new territory.”
Wall Street Warns: More Pain Still to Come
Despite his hopes to have the country operating normally by Easter, President Trump announced in a press conference last night that he is extending the social distancing mandate until April 30, and now hopes the country will be on the road to recovery by June 1.
That’s going to put additional pressure on an already struggling economy as restaurants, retailers and other businesses stay shuttered for even longer.
And despite last week’s dramatic rally in stocks, many on Wall Street are saying that things are going to get much worse before they get better, and are expecting further declines in the market.
Goldman Sachs’ U.S. chief equity strategist David Kostin wrote in a recent note to clients that “bear markets are often punctuated by sharp bounces before resuming their downward trajectory.”
Kostin says there were six distinct rallies of 9% or more between September 2008 and December 2008 during the financial crisis.
“Most bounces involved optimism around monetary or fiscal policy support. However, the market low did not occur until March 2009, when the pace of economic contraction began to slow,” Kostin added.
John Velis, a currency and macro strategist for the Americas at BNY Mellon, agrees that there could still be plenty of downside left in the markets.
“COVID-19 infections in the United States are still growing in number and we are not close to the peak of ‘the curve.’ Indeed, one could argue the worst is yet to come on the public health front, and this could entail ever more pain on businesses and employees — and the market.”
Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, also believes the market is still searching for a bottom.
“This analysis continues to keep us concerned that the U.S. equity market hasn’t found a bottom yet. It also reminds us that after the most severe equity market drawdowns, durable bottoms have taken time to form – something we think will be the case this time around as well. We are growing increasingly skeptical about the V-shaped recovery thesis in stocks. In particular, we are concerned that there has been too little discussion about the longer-term collateral damage from the public health crisis.”
Mohamed El-Erian, the chief economic adviser at Allianz, said in a Bloomberg op-ed article last night that even with last week’s rally he expects stocks to resume their slide.
“I fear that this is more likely to prove a temporary exception to what, unfortunately, is still an outlook for high stock market volatility around a still-downward trend.”
And economist Nouriel Roubini, known as “Dr. Doom” said in a recent tweet to “beware of bear market “head fake” rallies. The market can’t truly Bottom till the Virus tops & the rate of increase of new cases is sharply down.”
This isn’t to say investors should sit on their hands and do nothing until the market drops further. If you have a long-term outlook and can average into positions over time, adding a bit here makes sense while waiting to see which direction the market goes. If it drops further, you’ll have the chance to add more at even lower prices. And if the market rallies, today’s prices will seem cheap.
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