Why Stocks Are Higher Tuesday and Why There’s Still Cause For Concern

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Stocks rebounded Tuesday after a historic selloff Monday which was so ugly that trading had to be halted for 15 minutes.

Tuesday, the S&P 500 rose more than 3.5%, while the Dow Jones Industrial Average added more than 900 points (3.7%), with the Nasdaq up 3.37%. Investors finally moved out of the safe treasury market, sending the 10 year yield up to 0.67%. It hit an all-time low of 0.4% on Monday.

President Trump spoke of a “major” stimulus program in response to the expected weak economic data to soon be reported, as the Coronavirus has struck globally. The fiscal stimulus would likely include a reduction in the payroll tax, which is a tax on salaries and wages that companies and employees share. And to the extent that companies pay the tax, this would be a help to corporate operating margins. Starbucks, for example, is paying running salaries and wages to employees who are not working fully.

Added money into the pockets of businesses and consumers would also add extra padding to the expected second half recovery, should the Coronavirus be contained soon.

“Global stocks are rebounding on stimulus measures to recover considerably by the end of the year,” said Nigel Green, CEO of DeVere Group, a financial adviser with more than $10 billion under advice.

China also may implement fiscal spending.

These fiscal stimulus measures would come as many are growing wary that monetary stimulus has run its course. Interest rates are already low enough. Plus, to the extent they can be stimulative, there may not be much more economic stimulation, as the Federal Reserve only has so many rate cuts to work with. Many market participants also do not want to see the U.S. hit 0% interest rates.

“Markets have gotten used to being saved by central banks, and the knowledge that central banks have less ammunition to save them the time is adding to the fear factor,” said Jasper Lawler, head of research at London Capital Group.

But Lawler isn’t convinced the market will get its government spending. “Democrats won’t agree to tax cut, especially in an election year,” he said. “We’re not gong to hang our hat on Trump saving the day.”

 With the Senate comprised heavy of Republicans, there is still a decent chance this policy would pass.

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