Will a $2 trillion stimulus package be enough to save the economy?
David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — March 26, 2019
Reports that Congress was edging closer to an agreement on a $2 trillion economic stimulus package sent stocks soaring on Tuesday this week. The S&P 500® index rose 9.4 percent, while the Dow Jones Industrial Average gained 11.4 percent, its single best day since 1933. Stocks added modestly to those gains on Wednesday. In the past two days, S&P 500 has rallied 11 percent from its low close on Monday, although it remains 27 percent below its February 19 closing high. The Chicago Board Options Exchange (CBOE) VIX index of implied S&P volatility remained elevated. In contrast, implied volatility in the U.S. Treasury market fell for the second straight day this week, and both investment grade and high yield spreads narrowed in response to the announced Fed initiatives and prospects for economic stimulus. Municipal bonds rallied sharply as well.
Coupled with the earlier initiatives announced by the Federal Reserve, it is clear that Washington has gotten the message that the potential severity of the economic impact of the coronavirus calls for an overwhelming fiscal and monetary response. Late on Wednesday, the Senate finally approved the long-awaited stimulus bill, after a last-minute dispute over unemployment benefits. The House is expected to vote on Friday. The broad outline of the bill includes; $529 billion in relief for industry, including mid-size firms, in the form of loans, loan guarantees, grants, and investment in support of Federal Reserve facilities; $377 billion for loans to small business, forgivable with conditions; $300 billion for $1,200 checks to individuals with an income cap; $300 billion for employer payroll tax deferral relief; $250 billion for expanded unemployment insurance; $150 billion for state and local governments; and $100 billion for hospitals. Among other provisions, the bill includes a suspension of required minimum distributions and a deferral of student loan interest.
Time will tell whether the stimulus package is sufficient
Whether the stimulus proves to be sufficient remains to be seen. That will depend on the severity and duration of the economic slowdown. That it is necessary and welcome, however, is not in dispute. Citing surveys conducted in 2018 and 2019, the Wall Street Journal reported that if revenue stopped suddenly, 21 percent of small businesses would not survive for even one month. Another 34 percent would only be able to survive for between one and three months. Among workers, 31 percent said they could not afford to miss even one paycheck before dipping into savings, if they had any, and another 20 percent said they could miss no more than one paycheck. Congressional leaders have indicated that additional legislative measures are already being considered, as the economy transitions from emergency to recovery.
Economic data starts to show the impact of COVID-19; the White House debates next steps
The economic impact of the virus began to be reflected in the data this week. On Monday, the flash composite purchasing managers survey for March slumped to its weakest reading in ten years. Manufacturing contracted, but the rate of decline was not as severe as anticipated. Service activity, however, was far weaker than expected, reflecting the shutdown of travel and leisure activity. The results overseas were even weaker, especially in the Eurozone. U.S. mortgage applications for both refinancing and purchasing also fell last week by the most since 2009, as mortgage rates rose, and buyers had second thoughts. Today, the weekly number of initial jobless claims totaled 3.3 million, double the Bloomberg consensus forecast of 1.64 million. The size of the U.S. civilian labor force in February was 165 million, with 5.8 million, or 3.5 percent, unemployed. Today’s claims data implies a 2-percentage point rise in the unemployment rate.
A debate is emerging in the White House between a desire among healthcare professionals to continue the effort to slow the spread of the virus through social distancing, and a desire among the business community to reopen the economy as soon as possible. The president has expressed a preference to have the economy restarting by Easter, just two and a half weeks away. With the number of virus infections rising exponentially, expect that debate to become more heated in the days ahead. According to the Johns Hopkins University Coronavirus Resource Center, cases in the U.S. have now risen roughly tenfold in little more than a week to over 69,000.