It’s Not Just Stimulus Lifting Stocks — Virus Indications Could Turn

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Stocks have shot higher Thursday. 

The S&P 500 rose 4.6%, with the Dow Jones Industrial Average up 5.4% and the Nasdaq up over 3%. For the past several days, stocks had seen their good moments, but largely not to this magnitude. 

At first, investors and market analysts had said that the Federal Reserve’s numerous liquidity injections and Congress’ $2 trillion stimulus plan would prepare the economy for a sharp recovery after the coronavirus abates, but that a sharp recession will come through first. That will likely happen. 

Then, those actors began to recognize that, while stimulus can’t boost economic activity for a while, it was likely to tide households and businesses -- small and mega-sized -- over.

Jobless claims to the tune of 3.2 million in a week mean that people are losing income. Small businesses are paying overhead costs and seeing no revenues. Most sectors of the economy are seeing the same dynamic. The cash injection and Fed’s attempt to keep interest rates low may stabilize the economy for now — until more liquidity is needed. 

But the tone on Wall Street has been that, until the virus fades, there will be a recession and stocks will have limited upside. 

Stocks had priced in a recession, with the equity risk premium — or the excess rate of return demanded on stocks versus safe treasury bonds — rising to above 7% at one point in 2020. Now that risk premium is at 5.6%, as stocks have risen. That’s still high, but not as ominous. 

There will likely be a recession, but the market’s sentiment on the biggest risk, the virus, is beginning to turn, at least for now. 

"Our central scenario sees new infection rates in Europe and the US peaking around mid-April and the most severe restrictions start to be lifted from mid-May,” wrote UBS’ chief investment officer of global wealth management, Mark Haefele, in a note. "Coordinated fiscal and monetary stimulus prevents

a painful hiatus in economic activity from turning into a lasting downturn, resulting in a U-shaped recovery taking hold in the fourth quarter of this year.”

He added, "Investors may be encouraged by a fourth consecutive day of deceleration in the number of new virus cases in Italy, and the World Health Organization (WHO) suggests the peak will be surpassed by Sunday.”

A note from Morgan Stanley biotech equity analyst said s “sustainable decline in new case growth” in Italy could be in the cards. 

The analysts said that the peak total number of cases may hit 250,000 people in 20 days in Italy. 

Morgan Stanley's graphs, while they do not explicitly show percent increases in the spread, do show a projected downward bend in the rate of spread for the next few months. 

Still, U.S. health policy remains a question mark and investors will keep a close eye on containment efforts from the White House. 

As the virus potentially gets better, the economy will still be slow to resume to growth, as companies may be slow to rehire employees and stores and manufacturing plants also reopen slowly. Added liquidity will pad the recovery. But markets usually price in outcomes before they happen. 

Investors are expecting sentiment to remain pressured on some days, as ugly economic data rolls in. 

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