Stocks, the Economy, the Government — Your Thursday Market Open Update

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U.S. stocks are finally having a normal day Thursday. But they’re still down. 

Here’s a catch-up on where stocks are, where the economy is headed and what the government is doing to stop the bleeding. 

U.S. stocks were down Thursday, with the S&P 500 down 2.69%. Money still moved into treasuries, with the 10 year yield dipping slightly to 1.13%, a muted move. 

The S&P 500 is deep into bear market territory, down almost 30% from its all-time high. 

Strategists and economists are now looking for a 10% to 20% decline in GDP growth for the second quarter. With the coronavirus nowhere near contained, many wonder how long this potentially deep recession could last, creating almost no appetite for stocks. 

The federal government approved a $1.2 trillion stimulus plan, which includes $50 billion of loans for the ailing airline industry as almost all travel shuts down. Much of the full plan will go towards containing the virus. The government will also make $1,000 payments twice over the next few months to American families, some of which are experiencing layoffs and a a worsening financial outlook. 

Some on Wall Street focus on the improved financial position families will experience for the short-term as a result of this, while others note that the money must be spent to be effective. 

As for the stimulus plan at large, many are worried it won’t be enough and that it is small and medium sized businesses that need cash as much as large corporates do. “The government is in the process of figuring out what stimulus would work for protecting small and medium sized businesses, and today’s move in the global markets and early weakness in the SPX show President Trump’s current proposal of $1.2 trillion is still likely not enough,” said Canaccord Genuity’s chief equities strategist Tony Dwyer in a note, in which he predicts a recession now. 

“Market volatility will persist until the government – fiscal or monetary – provides a backstop to stressed corporates and small & medium businesses,” wrote Lauren Goodwin Economist and Multi-Asset Portfolio Strategist at New York Life Investments. "Support of those functions is vital to ensuring the economic disruption of COVID-19, though severe, is temporary."

While the Federal Reserve has used several tools, like buying treasuries, to keep short-term interest rates low and the money supply up, it has also turned to other tactics to keep a drying liquidity situation in the economy fluid. Not only has the Fed given the green light to its emergency fund of sorts to lend short-term commercial paper to businesses (in which rates have spiked), but the central bank is also supporting mutual funds. 

The Fed is providing liquidity to money market mutual funds, which are funds that buy highly liquid cash assets and short-term debt. These serve as a liquid investment vehicle for investors to park their largely uninvested cash. Investors, in a rush to raise cash ahead of a recession — while all asset classes had seen a dimming price appreciation outlook — had pulled out of these funds, forcing these finds to sell their investments. That put price pressure on short term debt assets, raising the cost of borrowing for companies. 

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