Investors Are Looking Right Past Fiscal Stimulus — Why Selling Continues on Wall Street

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U.S. Stock losses worsened Wednesday, as investors have too many concerns when it comes to both potential a recession and the effectiveness of federal government stimulus. Given where assets have been priced, the move into cash is on. 

All three major indexes in the country’s market fell, with those losses accelerating by the afternoon. The S&P 500 fell more than 7%, with the aggregate move across the indexes at around 7%. The 20 year treasury yield, to the surprise of some, moved up to 1.1%, as investors sold the safe bond while also selling stocks. 

The stocks market’s move triggered a limit-up-limit-down response once again, or band of price movement that can’t be exceeded. Prices can’t swing by too large a percentage in ether direction. When the average price movement on an index swings to that threshold, the rule kicks in. It kicks in after 5 minutes of that intra-day move staying put. 

The down move in stocks comes as the market has gotten the strong consideration of fiscal stimulus it has wanted, as the positive marginal impact of monetary stimulus potentially fades. News broke Wednesday that the federal government is considering $1.2 trillion of stimulus to the economy, likely ailing in the face go the Coronavirus pandemic. The stimulus would include $1,000 paid to each citizen or family in a given period of time, as some people do not receive pay and need to buy essentials. 

The Invesco Consumer Staples ETF  (RHS) - Get Report rose 0.59% Wednesday and has fallen just 4% for the year, while the broader market has fallen more than 25%. Costco has already reported a strong quarter, as customers stocked up ahead of lock downs. 

But stock investors at large are concerned. First off, there is little indication at present that the stimulus will ultimately work. "we estimate that the US package would be sufficient to provide relief for around three to four months of "social distancing" measures, if the money is used correctly,” wrote Mark Haefele, UBS’ chief investment officer of global wealth management in a note. The added money, used correctly, is still a question mark. 

Mike Loewengart, head of investment strategy at E*Trade, wrote in emailed remarks to reporters that “The market’s cheers of a $1 trillion government injection into the economy has quickly dulled—renewed pandemic concerns have catapulted the market back into the red. It’s highly likely we’ll continue to see, as we did throughout the trade war, good news days followed by bad news days, and vice versa.”

“With monetary policy now largely spent — not just in the U.S., but around the world — investors’ attention will focus on the public health crisis and the fiscal policy response from the world’s governments,” wrote Nuveen’s chief investment strategist, Brian Nick. “We believe the depth and duration of the economic downturn will be determined by the healthcare policy measures to halt the spread of the Coronavirus."

With uncertainty over when the virus will b contained, the length of the likely recession is also in question. Stimulus won’t work until people and business feel free to be out and about. 

Also, some workers, getting laid off, may not recoup their jobs. Concerns over a previously tight labor market are mounting. “Investors will also be hoping for further direct measures to protect employment as the policy response evolves,” Haefele said. 

“Mitigation factors to help contain the virus’ spread are having a dramatic negative effect on consumer and business spending, which we expect will spill over into the labor market,” Nick said. 

As for safe treasury bonds, many on Wall Street agree that investors are selling bonds as well as stock to raise cash, which can be deployed into financial markets later. For now, not only are stock prices in free-fall mode, but bond prices hadn’t had much upside either and investors want liquidity. 

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