Did the Bottom Fall Out of Stocks on Virus Bill Failure? What’s Needed Most -- ICYMI

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Maybe stocks were to keep drifting a bit lower while Wall Street said they were beginning to stabilize. But now the Advil bottle that hurting investors were running on just ran out.

After Sunday evening's congressional failure to pass a $2 trillion fiscal stimulus bill that would heavily focus on coronavirus aid, some investors and analysts were patiently watching the news flow to see if Congress could come to terms Monday. By afternoon, news broke that the bill failed again.

The S&P 500, after having been down 1% in the morning, dropped 4.5% by midafternoon Monday. The Dow Jones Industrial Average was down as much as 3.4%.

Markets were showing signs of stabilization. After having more than a week of 5% or more swings on the upside and downside, the S&P 500 had more muted moves starting Thursday, which was an up day. Strategists were saying this was a sign that, while the indefinite time span of the virus and therefore recession would mean more near-term downside, the bottom could be near; stock price swings would be stable.

And the actions of the Federal Reserve, while appreciated by investors, cannot be fully priced into the price of stocks until the virus is over. Lower interest rates and more cash for people and businesses don't matter of people are afraid of going out and getting stick. Near-term cash injections for households and businesses holding on for dear life can only last them until they need even more cash as the virus stays.

All forms of stimulus are "another essential step forward in providing a floor for risk markets but, unfortunately, it is not sufficient," said Seema Shah, chief strategist at Principal Global Investors.

What investors are most interested in is a package that would focus on containing the virus.

While "It looks like we are headed toward loans from the Fed to Main Street and direct government equity stakes for affected companies," noted LPL Financial Equity Strategist Jeff Buchbinder, "now it's Congress's turn. We hope a deal will be struck shortly after the Senate reconvenes at 1 p.m. ET today," Buchbinder said before the news.

"The economic headwind will depend on the magnitude and length of efforts required to contain the virus," wrote Jason Pride, chef investment officer of Private Wealth at Glenmede.

And the bear market is deep. The S&P 500 is down 33% from its all-time high, with a 20% drop from that level defining a bear market. Strategists point out that a 30% drop usually indicates a pick-up from that new level shortly after.

And given where stocks are valued against the price of long-term safe treasury bonds -- the 10-year yield is at 0.77% -- the stock market may look attractive to some, as it is pricing in a recession. And markets, which are often efficient, price outcomes in before they happen, meaning that stocks may soon be in for a bounce.

"Long-term expected returns for stocks now appear unusually high relative to long-term expected returns on cash and fixed income," Pride said. "Such a shift in valuations and expected returns should provide a meaningful rebalancing opportunity for long-term investors able to weather the ongoing storm."

But this crisis is unique. It wasn't self-inflicted, the way the over leveraged banking system derailed the economy in 2008. This is a health and human crisis that can get worse. The uncertainty is rocking investors. And many on Wall Street call for a deep recession, one that may be persistent. This means stocks can be in freefall mode indefinitely, as selling pressure remains.

In a recent phone conversation with TheStreet, TD Ameritrade's Chief Market Strategist JJ Kinihan answered the question of the market needs the most. His answer: "doctors." 

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