Tuesday, May 26, 2020

U.S. markets surge as massive economic stimulus plan takes shape to offset coronavirus

Mar 18. 2020
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By The Washington Post · Taylor Telford · NATIONAL, BUSINESS, WORLD 

U.S. authorities on Tuesday accelerated testing to gauge the spread of the coronavirus as stumped investors struggle to diagnose the deadly virus's economic fallout. Markets sloshed in big, nail-biting swings that have become commonplace in recent days.

The Dow Jones industrial average jumped more than 1,000 points, or roughly 5.2 percent, after a volatile day of trading. The Standard & Poor's 500 index climbed nearly 6 percent and Nasdaq Composite finished up about 6.2 percent after the Federal Reserve and U.S. government rolled out plans to blunt the disease and its effect on American lives, from a reported $1 trillion stimulus to a $10 billion credit infusion to a pledge to beleaguered Boeing. 

"The volatility shows the desperation on Wall Street to find fair value," said Michael Farr, of Farr, Miller & Washington. "Each news release and statistic is greeted with 1,000-point swings." 

One big fix came Tuesday morning, when the Fed announced plans to launch a special fund to keep credit flowing during the coronavirus crisis. That gave the Dow a 1,100-point lift, though the blue-chip index gave up more than half those gains by midafternoon.

Starting Tuesday, the central bank will buy significant amounts of commercial paper, the short-term loans that businesses rely on for funding to pay bills and other expenses. The Fed did the same thing during the Great Recession and ended up buying about $350 billion worth of these loans, or about 20 percent of this market.

Treasury Secretary Steven Mnuchin also announced that the White House was looking at giving direct cash payments to Americans as part of a massive economic stimulus package of around $850 billion, which the administration hopes will stanch the economic free fall caused by the coronavirus. President Donald Trump had initially supported a payroll tax holiday, but said Tuesday that it would take too long to deliver relief to Americans.

"We're looking at sending checks to Americans immediately," Mnuchin said Tuesday at a briefing. "And I mean, now in the next two weeks." 

The news delivered a much-needed break to U.S. markets, which had been bouncing wildly between positive and negative territory on the heels of their worst day of trading since the 1987 "Black Monday" crash. All 11 S&P stock sectors were positive. All but five of the Dow 30 components were positive, with Dow Inc., Intel and Travelers the big winners. The yield on the 10-year U.S. Treasury note, a key fixture of global finance, flew above 1 percent - a sign of happy investors.

Boeing and McDonald's were the losers. The fast-food giant expects to take a hit because nearly all its franchises are operating only drive-through, takeout and delivery services.

The decline of Boeing stock, once a Dow powerhouse, in some ways reflects the fall of the 11-year bull market that ended last week. At $125 per share, it is a fraction of the $400 it commanded a year ago, before problems surfaced in its 737 Max jet.

Volatility has reigned as investors struggle to parse the coronavirus' increasingly disruptive presence in the United States and the growing threat of a recession. The highly watched Cboe Volatility Index, Wall Street's "fear gauge," saw its highest-ever close Monday after the Dow plunged 3,000 points. The index's new high eclipsed the one set during the 2008 financial crisis.

"This is unlike anything we have ever seen," said Jeffrey Kleintop, chief global investment strategist at Charles Schwab. "The impact this is having, not only on energy markets, but financial services, the travel industry and people's everyday lives is really immeasurable." 

Monday's rout came after the Federal Reserve slashed interest rates to zero and said it would revive "quantitative easing," a remnant of the financial crisis. Last-minute losses came after Trump warned that disruption from the coronavirus pandemic could last through August and issued new public health guidance, saying Americans should limit gatherings to no more than 10 people.

"I remember some breathtaking sell-offs after 9/11," said Kristina Hooper, Invesco global market strategist. "But this more closely resembles the crazy moves I saw during the Global Financial Crisis." 

When asked if there was a 100 percent chance of the U.S. economy tipping into a recession, as some economists have predicted, Trump said "It may be." Ratings company S&P Global are now forecasting a global recession this year, with global gross domestic product growth of just 1 to 1.5 percent in 2020.

"The initial data from China suggests that its economy was hit far harder than projected, though a tentative stabilization has begun," S&P Global's Chief Economist Paul Gruenwald said in comments emailed to The Post. "Europe and the U.S. are following a similar path, as increasing restrictions on person-to-person contacts presage a demand collapse that will take activity sharply lower in the second quarter before a recovery begins later in the year." 

Ed Yardeni of Yardeni Research has joined the pessimist camp. He estimates a 4 percent to 6 percent gross domestic product drop in the second quarter followed by up to a 4 percent drop in the third.

"That would be a severe recession," Yardeni said in his morning briefing. "The question is whether it will be a short one. Needless to say, that depends on the virus. I'm of the opinion that the worst will be over by midyear." x

Industries that have been walloped by the coronavirus are asking for government assistance to weather the storm. U.S. airlines are asking for more than $50 billion in federal assistance amid the economic uncertainty caused by the dramatic decrease in passenger traffic. That would be more than three times greater than what the industry received after the Sept. 11 terrorist attacks.

Casinos are also asking Congress for emergency financial help. The American Gaming Association issued a statement to The Washington Post on Monday, saying that with the $260 billion industry at a "near standstill," additional funds are needed to support casino companies and their employees.

Major retailers, including Apple, Patagonia and Abercrombie & Fitch, are shutting their doors through March to contain the coronavirus. Though store closures could be crucial to slowing the speed of the disease, they also sap consumer spending, which powers 70 percent of the U.S. economy.

More than half the jobs in the U.S. economy - about 80 million - are at moderate or high risk of being negatively impacted by the coronavirus outbreak, according to Moody's Analytics, through decreased hours, lower pay or job loss.

 

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