Are Financial Markets Ready for Next Coronavirus Wave?
As we know well by now, the financial markets have recovered nicely from the initial wave of the coronavirus, at least until recently.
Certainly, the most recent economic news has borne out that optimism. Retail sales jumped a record 17.7% in May after plunging 14.7% in April, the first increase in fourth months. Moreover, May sales in dollars were only 7.7% below where they were in February before the worst effects of the virus hit. In other words, after an extraordinary dip, spending is already close to where it was as more stores and restaurants reopen.
Elsewhere, the Conference Board’s index rose a better than expected 2.8% in May after falling 6.1% in April. Sales of newly-built homes jumped 16.6% while the National Association of Home Builders’ confidence index surged 21 points in June to 58. Sales of existing-home sales, by far the largest category, dropped nearly 10% in May, but that “reflected contract signings in March and April, during the strictest times of the pandemic lockdown,” the National Association of Realtors said, adding that “home sales will surely rise in the upcoming months with the economy reopening, and could even surpass one-year-ago figures in the second half of the year.”
While all of that is undoubtedly good news, is it sustainable? Right now, two main questions are facing the economy and the financial markets: How bad will a dreaded “second wave” of the virus be on both the nation’s health and economy and what happens now that the U.S. government’s stimulus programs have started to run out?
If the headlines can be believed, new coronavirus cases are rising, leading some state and local officials to reinstitute lockdown measures just as other states are relaxing theirs. At the same time, the “helicopter money” the federal government rained on just about all U.S. citizens has largely been delivered and spent, the $600 a week unemployment bonuses are nearing their expiration, and the Payroll Protection Program loans to incent small businesses to keep their employees on the payroll, while still available, have reached the forgiveness stage for many borrowers.
What happens next?
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If there’s anything we learned from Round One is that we can’t shut down the vast majority of the U.S. economy for any length of time without it creating even bigger problems. While it’s certainly reassuring that the Treasury and the Federal Reserve can throw massive amounts of money to tide individuals and consumers over for a few months, basically, it can’t do so forever, whatever Modern Monetary Theory advocates believe. Although that doesn’t mean they won’t try.
Already President Trump and others are talking about a second round of stimulus checks, perhaps bigger and more widely dispersed than the first one. More sectors of the economy that have been neglected so far appear to be in line for their own bailouts. For example, earlier this week, a bipartisan group of 100 Congressional representatives called on Treasury Secretary Steven Mnuchin and Fed Chair Jerome Powell to create a lending facility for landlords of large commercial properties who have seen lots of their tenants stop paying rent.
At the same time, the Fed has increased its purchases of corporate bonds – many of them now junk-rated – so a bailout of institutional property owners seems entirely fair. As Powell has said repeatedly, the Fed will do “whatever it takes” to keep the economy afloat, a process he says will take years. Indeed, if the 2008 financial crisis is any guide, it will more realistically take decades. Even with the Fed’s balance sheet now at $7.1 trillion and counting and the federal deficit at $26 trillion, more aid can be expected.
But there’s also a huge amount of private money looking for a home.
The Wall Street Journal reported this week on the “Coronavirus Savings Glut,” predicting “a boom in savings and depressed interest rates,” the result of “crushed” consumer spending.
With the Fed having largely cornered the U.S. Treasury and residential mortgage-backed securities markets and now also one of the biggest players in the corporate bond market – and possibly the commercial MBS market next – where can investors turn for a decent return on their money in the financial markets?
It’s TINA – There is No Alternative – to stocks, that is. While another stock market correction resulting from a possible second coronavirus wave can’t be ruled out, the long-term case for buying stocks is just as compelling now as it ever was, if only because there’s no place else to go even more so if the Fed starts buying equities, which can’t be ruled out.
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