We Need Broad Fiscal Stimulus, Right Now: Strategists

If you want to understand how financial markets are acting these days, you only have to look at recent history, namely the 2008 global financial crisis.

"The S&P 500 is running the 2008 Financial Crisis playbook at an accelerated pace," said Nicholas Colas, co-founder of DataTrek Research, in a recent market note. "In 2008 it took 19 trading sessions to go from the first 5% drawdown day on the S&P 500 (our definition of a "crash") on September 29th to a +75 VIX reading. This time around it only took three days, from March 9th (down 7.6%) to a +75 VIX at Thursday's close."

But all hope is not lost. "We can avoid a repeat of the worst parts of 2008's market volatility if the US government's response to COVID-19 comes faster and more decisively now than then," wrote Colas.

To date, the health response — from state, local and federal governments — has focused on sharply reducing contact between people and the economic response has been led by the Federal Reserve.

The central bank has slashed interest rates, revived quantitative easing, added liquidity to overnight markets, lowered bank reserve requirements, eased borrowing from its discount window and as of Tuesday, re-established a commercial paper funding facility to help companies borrow in the commercial paper market, which has come "under considerable strain in recent days," according to the Fed.

Watching Washington

The Treasury is proposing a $1.2 trillion economic stimulus package that would include $1,000 checks for Americans — whether for individuals, families or just adults is unclear — and the IRS is postponing the April 15 tax payment deadline by 90 days.

The market is taking notice of all these initiatives. The S&P 500 closed up 6% on Tuesday following a 12% decline on Monday, its worst performance since October 1987. The Dow Jones Industrial Average finished 5% higher, and the 10-year Treasury note was yielding 1%, little changed from its previous close, but up sharply from its 57 basis-point close a week ago.

The House has already approved an $8.3 billion stimulus to assist state and local governments and is currently working on another stimulus package to provide more funding for food stamps and Medicaid, along with paid sick leave and free coronavirus testing. The bill passed the chamber early Saturday morning, but it has been watered down to get Senate approval, which is pending.

"Government can do more things here," said David Kelly, chief global strategist at J.P. Morgan Asset Management. In addition to what's already been proposed, legislation needs to include increased unemployment benefits, especially for low-wage workers, and strong support for business to help them avoid bankruptcies, said Kelly.

"We will have a recession, and a fiscal response will limit it," he said.

Though first-quarter growth "looks fine," second-quarter GDP could decline somewhere between 5% and 10%, followed by a smaller decline in the third quarter, Kelly said.

The "virtual collapse" of the airline, hotel, cruise line, restaurant and bar industries and the cancellation of major-league sports games for the foreseeable future all add up to a "huge number" of unemployed workers, over 20% of the workforce, Kelly said. "2020 will be a ghastly year and that will go down in the annals of the history of the market."

Goldman Sachs and Morgan Stanley as well as economist Gary Shilling all say the global economy has already slipped into recession.

One new indicator of the domestic economic slump: A New York Fed survey of business leaders in the metro area, conducted between March 2 and March 10. Its current business activity index fell 23 points to -13.1, its lowest level in more than three years, and its index for future business activity fell more than twice that, down 49 points to -13.7, its lowest level since 2009.

"A recession will be hard to avoid," said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. "The next move has to come from a congressional package."

If the U.S. government fails to limit the spread of the virus and offset its negative economic impact, "even short- to intermediate-term bond rates could fall to zero," Jones said. "It's a dire scenario but I wouldn't rule it out."

At Tuesday's market close, the the two-year Treasury yield was 44 basis points.

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