US, WASHINGTON (ORDO NEWS) — Dow jumps more than 1,200 points on hope that a coronavirus rescue bill is close.File Ordo News
Wall Street surged at the opening bell on Tuesday after hitting limit up twice in premarket trade, with the coronavirus stimulus in focus. Senate Majority Leader Mitch McConnell said yesterday there will be no further votes on the Republican party’s coronavirus stimulus bill.
Meanwhile, House Speaker Nancy Pelosi unveiled Democrats’ stimulus package proposal worth $2.5 trillion and said she is hopeful an agreement can be reached in the next few hours.
Investors are expecting for the Markit Economics to release the data of the monthly composite reports on manufacturing and services. Also, the US Census Bureau is releasing the data of the new home sales later in the day.
The Dow Jones jumped 6.05% at the opening bell. The Nasdaq 100 added 5.06%. The S&P 500 also surged, adding 5.31%.
The euro rose 0.99% against the dollar, buying 1.08357 at 9:33.
– The price of trust –
If the governments of the United States and Europe are not able in the coming weeks to convince investors that the situation is under control, then the fall in the stock market may set a new anti-record. But if investor confidence can be restored, we can see a rapid recovery in markets, says Anton Barinov, founder of iNDEX online investment school.
The stock market is hardly an accurate tool for assessing financial assets, but it clearly reflects the level of investor confidence in governments and central banks of individual countries. In 2020, this trust proved to be undermined as soon as possible, and immediately on a global scale. As a result, we saw the fastest drop in the stock market by more than 20% in world history.
The last time a global loss of investor confidence occurred in 2008, when the US government hesitated to support the financial system and allowed the large investment bank Lehman Brothers to go bankrupt. Now the reason for the loss of confidence is the belated and inconsistent reaction of the American and European authorities to the spread of coronavirus.
The governments of the USA and Europe were not able to limit in time the movement of people and their interaction among themselves, as a result, the virus began to spread uncontrollably. There was a real threat of collapse of the health system due to the lack of hospital beds and medical supplies.
Until solutions are found that will allow us to get rid of the virus in an understandable time and keep the economy afloat, the market will look for a new bottom. The more complex and logical these decisions will be, the faster investors will believe in them and the sooner the stock market will return to growth.
What specific solutions could restore investor confidence?
1. A systematic plan to defeat the virus in a short time, eliminating the risk of a “second wave” or “creeping expansion”
Investors have no illusions about the vaccine, as experts unanimously declare that it will appear no earlier than the end of 2020. Therefore, all hope for the actions of governments. The tough measures taken by the Chinese government look convincing for investors, because thanks to them, China was able to return to normal after 6 weeks of quarantine.
But the actions of Western governments so far raise questions. In particular, there is a fear that lax quarantine measures, which are also local in nature, are not able to eradicate the virus completely, and can only slow down its development in a single focus. At the same time, there remains the risk of a new outbreak in the same city or in a neighboring one, in which case quarantine measures will be introduced again and again.
A cascade of quarantines of 6–9 months in length can lead the economy into a protracted recession on a much larger scale than it did in 2008–2009. Already, investment banks forecast a 14-30% drop in the US economy in the second quarter – there has not been such a quarterly fall since the Great Depression of the 1930s. If in the following quarters economic activity will fall due to new quarantines, then a huge number of companies will simply go bankrupt.
A solution that would satisfy investors should be comprehensive, protect against potential risks and have a tight deadline. If the final set of measures adopted in the USA and Europe stretches the solution of the problem for more than 6 months or leaves a loophole for the second wave of virus and quarantines, investor confidence will remain extremely shaky.
2. A comprehensive plan to support the economy, eliminating the risk of massive bankruptcies and unemployment
Until now, the US and European authorities have tried to support the economy and the stock market mainly by monetary methods, that is, by injecting money into the financial sector. In particular, the US Federal Reserve System has reset interest rates and began to massively buy government and mortgage bonds from the stock market.
This set of measures was striking in its scope, but investors found it insufficient. Why? Because most of these measures were based on recipes for the 2008 crisis. In 2008, such measures were adequate, since it was poor-quality assets and a high level of financial sector debt that caused the crisis.
Now the cause of the crisis is a radical decline in economic activity in a number of sectors of the economy, including air transportation, tourism, restaurants, the automotive industry, etc. Providing money to banks does not solve this problem, since banks are not ready to direct funds to lend to problem sectors. As a result, financing simply does not reach the end consumer.
In addition to monetary incentives, the US Congress is discussing a bill aimed at stimulating the economy through the state budget. The size of the stimulus package is enormous: it is $ 2 trillion, that is, about 10% of the annual US GDP. Measures include loans to small businesses for the payment of salaries, an increase in unemployment benefits, subsidies to the most affected companies (for example, airlines), money for the purchase of medical equipment, and an unprecedented measure for the United States: a lump sum payment of $ 500 per child and $ 1200 per every adult American whose income does not exceed $ 75,000 per year.
The adoption of this bill for some time will support people who have lost their jobs or income, as well as large companies from problem sectors. However, the likelihood of bankruptcy of a huge number of small and medium enterprises will remain high.
In the context of lower revenues, small and medium-sized businesses will not be able to pay rent and service debt, even if it is assumed that state loans will cover salary payments. Massive defaults on rents will create difficulties for mortgaged commercial property owners; defaults on suppliers will disrupt production chains and cause a wave of defaults across the country, which will ultimately hit the banking system and capital markets.
There is also the risk of bankruptcy of many large enterprises that are not among the most problematic sectors, but nevertheless suffer greatly from quarantine. In the event of defaults on their obligations, these companies will no longer be able to resume work after quarantine has been lifted. As a result, millions of people will lose their jobs, and the negative impact of the virus on the economy will last much longer than quarantine measures.
An economic support mechanism that could inspire investor confidence should take these risks into account. For example, the US government could guarantee repayments for all corporate and private loans over the next 3 months. The total corporate debt of the United States is about $ 10 trillion, and the debt of the population is about $ 15 trillion.
At an average interest rate of 4%, the aggregate interest load for three months is $ 250 billion. Even this amount fits the scale of the incentives that are being prepared, while the real burden on the budget will probably be less, given that many companies and individuals will still be able to service debts. For commercial property owners, such a government guarantee may be subject to the provision of substantial discounts to their tenants.
3. Evidence-based assessment of consequences in case of uncontrolled spread of coronavirus
It is always important for investors to understand the worst case scenario, and the situation with the virus is no exception. What will be the real extent of the disease and mortality if the situation with the virus gets out of control?
Some politicians and virologists predict that billions of people will be infected with the virus and millions, if not tens of millions, will die. Apparently, these estimates are based either on mathematics or on emotions and do not take into account any additional factors.
Firstly, there is a lack of understanding of how many people in a given country have already had the virus asymptomatically or mistook it for a common SARS. Such an understanding can arise only in the case of mass testing of the population for the presence of antibodies to the virus. As a result, it may well turn out that a significant part of the population has already been ill with the virus and has immunity to it.
Secondly, it is necessary to take into account potential mutations of the virus if it spreads to millions of people. Perhaps the level of contagiousness and mortality of the virus will decrease significantly at a certain stage, which will require adjusting the scale of potential infection and mortality.
Conducting a scientific analysis of this issue with the assistance of the best world experts would allow politicians to make more informed decisions, and investors to exclude the most apocalyptic from possible scenarios for the development of the situation.
As of March 24, the stock market fell about 35% from historical peaks reached at the end of February. This indicator is not just a correction or a “bear” market, but a real crisis. However, if we turn to the history of previous crises, it becomes obvious that the scale of the fall may well be 50% or more.
If the governments of the USA and Europe fail to convince investors in the coming weeks that the situation with the virus is under control and that chaos in the economy can be avoided, then the fall of the stock market could set a new record. If investor confidence can be restored, then we can see the markets recovering as fast as they were falling rapidly.
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The article is written and prepared by our foreign editors from different countries around the world — material edited and published by Ordo News staff in our U.S. newsroom press.