We finished the week with most markets rebounding over 10% by week end. Initially, news that the stimulus bill stalled in Congress as Democrats objected to the lack of transparency in how the $500 billion loan program would be managed gave the market a reason to open the week with uncertainty and weakness. Tuesday sentiment changed in anticipation of a $2.2 trillion stimulus package. After that, we witnessed the most robust one-day rally since 1933, up 11% in the Dow, followed by two more positive days before the market slumped, giving back some of the gains earlier in the week. The Senate passed the bill on Wednesday and the House on Friday with unanimous consent. The package included $350 billion in support for small businesses, along with a $1,200 one-time payment per person and $500 per child depending on individual and family income. Also included was the expansion of unemployment benefits and funding for healthcare.
Canada also came forward with its stimulus package having an original price tag of $82 billion, but when passed on Wednesday, had climbed to $107 billion. Qualified workers who have lost all income will have access to as much as $2,000 per month for four months, a 6-month interest-free reprieve on student loan payments, an extension of tax filings, and assistance to the indigenous population.
The US Fed also joined the party with support for the corporate bond market which has come under pressure in the last several weeks as investors become worried about revenues with expanding business shutdowns due to the virus.
News of the virus continues to dominate the news cycle; however, the markets focused on something other than the virus, ignoring the acceleration of new cases and increasing death rates in the west. Negative economic indicators are anticipated for the first quarter and are expected to become more negative in the second quarter. The rise in US initial jobless claims was all but ignored as it rose to 3.3 million, up over 280,000 from the previous week.
Recession worries and whether we are going to have a V or U-shaped recovery is being debated among economists and analysts. There seem to be two camps. One camp suggests we need to quarantine everyone stopping all economic activity. Most medical professionals seem to think this may be the only way to conquer the virus at this point. The other camp suggests more limited response allowing for some economic activity to take place while acknowledging social distancing and other precautionary measures to reduce viral transmission. The problem with the first solution is, at some point, chaos erupts if people run out of food and/or money to pay for what is available. There is no easy solution, and the economic impact is likely to be severe unless, as some think, the weather improves and the virus dies off. On an optimistic note, Chinese economic activity is reportedly re-starting, giving hope that light is at the end of the tunnel.
As we have been saying for the last several weeks, volatility will be with us for some time as news of the virus, fiscal and monetary responses along with economic data, recession and comparisons to past market crashes stirs investor emotions. Sustainable improvement will require solid economic and corporate fundamentals, otherwise we fear that 5% and 10% daily moves will become commonplace.
Warren Gerow is an independent consultant to Sightline Wealth Management.
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