The novel coronavirus is spewing surprises everyday at global stock exchanges. Are the hefty government stimulus packages enough to build investor sentiment?
A straightforward answer to the above much-discussed topic is- no one knows, yet. With no fixed timeline of the virus’ continued presence and no deadline as to when will businesses be back on track, one cannot comment upon the government aids being too much, too less or just right.
Ever since the novel coronavirus, COVID 19 has deemed itself as the world’s invisible enemy, nothing has seemed normal- be it regular lifestyles that are impacted by lockdowns and stay-at-home mandates, businesses which have been hard hit due to manufacturing delays and closures, stock exchanges that have been on a sell off spree and bearish sentiments taking a toll on investor actions etc.
The USA, the world’s supreme power as some might call it and the largest economy is no longer discussed for its developments, but for the number of COVID 19 cases, while it battles the virus war as the world’s most affected region.
Let us understand the current situation in the USA, the stance of US stocks on the exchanges and the role of the government amid the crisis hour-
COVID 19 Situation in the USA
According to a JHU CSSE dashboard, as on 27 April 2020, the US had over 965k confirmed cases of COVID 19, more than 54k deaths and 106k reported recoveries. Though the country has conducted over 5 million tests, these statistics make the US to be the most affected country by the pandemic.
As the need of the hour is to contain the spread of the virus in ways possible and more, the US is in a lockdown situation since more than two weeks. The country implemented a range of measures including travel restrictions, social distancing, declaration of states of emergency, closure of schools, bars and restaurants, and increased testing.
Consequently, businesses have suffered. In fact, they have been hit so hard, the Americans started protests. The anti-lockdown protests as we may call it, were for the government to lift the stay-at-home and allow Americans to get back to work to save the economy plummeting any further. Health officials opined that given the gravity of the situation and the rampant spread, this move would not be a wise one, at least not right now.
However, few states like Georgia, South Carolina, Oklahoma and Alaska have started to relax the lockdown orders on their pandemic-injured businesses, while Texas businesses have reportedly already opened up. Florida and Michigan have also dropped hints that they might begin to ease restrictions.
US Stimulus Packages
In response to the COVID 19 mayhem, the US Government launched an estimated USD 2.3 trillion (around 11 % of GDP) Coronavirus Aid, Relief and Economy Security Act (“CARES Act”). This was followed by a further USD 8.3 billion Coronavirus Preparedness and Response Supplemental Appropriations Act and USD 192 billion Families First Coronavirus Response Act which together provides around 1 % of GDP.
Federal funds rate were lowered by 150 basis points in March to 0-0.25 basis points and Federal Reserve introduced facilities to support the flow of credit, backed by the Treasury using funds appropriated under the CARES Act in few cases.
Federal banking supervisors encouraged depository institutions to use their capital and liquidity buffers to lend, to work constructively with borrowers affected by COVID 19 and facilitate loan modifications. Besides this, ratio (community bank leverage) was lowered to 8%.
More recently, last week, the US Congress unanimously passed a new COVID 19 relief package worth USD 484 billion, the fourth emergency coronavirus response bill (interim in nature) in the country. The aim of this package is to support small business aid fund, while funding hospitals and facilitating virus testing. The bill brings the total federal spending on the virus relief to up to USD 3 trillion.
Stance of US Stocks Amid Pandemic
The share market is one of the most sensitive places that quickly responds to micro and macro level amendments. Owing to the COVID 19 situation, the US stock markets demonstrated a sell off spree especially in March end and April beginning.
But a lot happened parallelly.
The US Government injected stimulus packages in the economy to help it recover from the COVID 19 woes. A major chunk of this is to provide for businesses- for them to reopen, rework, remanufacture and resettle well again. The act has noticeably been welcomed by investors who feel that the economy will soon show signs of recovery.
Another factor was the mixed corporate earnings season. The first quarter earnings reports that depicted early impact of the coronavirus pandemic on business also saw quite a few companies lowering their guidance for future performance amid virus situations. Role of the stimulus packages which is majorly focused on business activities, could built onto investor sentiment positively.
Moreover, oil prices have rebounded, reversing some losses from historic lows earlier in the week.
According to Forbes, the U.S. stock market has recovered about half of its four-week ~35% plummet from its all-time high on 12 February 2020.
On Sunday night, Dow Jones Industrial Average futures were up 254 points, while the S&P 500 and Nasdaq 100 futures also pointed to a higher Monday open. This was a probable result of the fall in oil prices as the possibility of re-opening the economy.
A fall in new virus infections and unprecedented monetary and fiscal stimulus seems to have sparked a massive stock-market rally from the recent lows. How the stock market will respond to events in the near term will be an interesting gauge. Will the market take on the previous highs and will the fear-inducing pandemic will wreak more havoc on the economy- time will tell, as there remains no good way to forecast.