With coronavirus aid programs such as PPP loans and Federal Pandemic Unemployment Compensation coming to a close in the next several weeks, the Fed and Congress are gearing up for a second round of economic stimulus. Not to be outdone, European governments, are also getting in on the act. And markets are responding.
While there will be plenty of sturm and drang as officials hammer out the new packages, it would be a major surprise if the new stimulus in the US did not exceed $1 trillion That’s the number Treasury Secretary Steve Mnuchin is using, indicating the focus of the aid will be on “kids and jobs and vaccines.” Democrats are pushing for another round of stimulus checks and an extension of the popular Federal Pandemic Unemployment Compensation payments of up to $600 per week through January. The administration is seeking a payroll tax cut as a part of the new package, though at the moment, that particular goodie does not appear to have widespread support among Senate Republicans. Relief for state and local governments, perhaps in the form of greater flexibility in the use of federal funds, is expected to be a key component of upcoming negotiations. The ramifications for the municipal debt market are significant indeed, with state and local governments likely facing huge revenue shortfalls as a result of suppressed economic activity.
Government response to the pandemic is also accelerating in Europe. Today, the European Union announced it would borrow hundreds of millions of Euros to assist the hardest-hit European nations such as Italy and Spain. Not only does this provide a critical lifeline to Europe’s south, already hobbled by significant existing debt, it also signals the EU integrationists are ascendant. The borrowing is expected to total 750 billion euros, part of a 1.8 trillion euro overall spending package.
Market are pricing in a recovery.
The S&P 500 is now up more than 5 percent this month and the Dow is up almost 4 percent. The tech-heavy NASDAQ has gained more than 6 percent (and is up 19 percent for the year.) The VIX index, which measures market volatility—often equated with fear--has fallen more than 18 percent.
COVID-19 is still spreading like wildfire in much of the US, with almost 49,000 new cases at the time of this writing, bringing the US total to more than 4 million. However, masks seem to be less of a political statement today than they were a month ago, as more studies have shown they can dramatically reduce the spread of the disease. This could change the game rapidly.
With the central banks of the world continuing to pump money into the global economy, financial markets continue to function well, and asset prices have clearly benefited. The outperformance of the megacap tech names continues to astonish, particularly AMZN, now up 14 percent for the month.
Even if we weren’t in the midst of a global pandemic, late summer is a transition period, when investors begin to look past the current year and focus on next year. I can think of perhaps no forward year in my career that would have been more difficult to handicap. But the central banks are making sure the gravy train is running while we wait.
Any opinions are those of Burke Koonce and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Burke Koonce is a financial advisor at Raymond James & Associates, Inc., member New York Stock Exchange, member SIPC.