Why markets are rallying and why the economy shut-down will end soon
We’re opening up the stock market today much higher, significantly higher. The Dow Jones is up about 1300 points. Speaker Pelosi has just come out and said that there is a really good chance that they’re going to pass a stimulus bill today out of the House and we’re seeing just a really ebullient market today with a lot of positive feelings out there. And I’m in front of a S&P 500 chart and you can just see down to the bottom of my left that we’re bouncing obviously up 5%. We’ll probably be up more later today, but it is instructive to see just how far we’ve fallen just from March alone and then of course from the highs back in February 19. Now, I just want to run through what is going on and why we’ve seen this big balance from the stimulus bill or at least that’s what people are telling themselves right now.
What Happened in the Markets?
This rally actually started yesterday and I want to point out something that’s really interesting that I keep an eye on as a narrative economist and that is, I’m always looking for events to occur that should propel the narrative or trend forward, but don’t. That tells me that something’s happening that’s going to change the trend. And that’s what we saw. It started last week. We had a couple of events like that, but we kept going down. Yesterday, we really saw a major change and that was when we had the Senate vote down their own stimulus plan that they’d come up with. They couldn’t get enough votes on that. And the markets went down for sure. They went down about 4%. But remember they started the day down 5% and so they were kind of waffling around and they went down 4% but they didn’t stay there. They ended up rallying back about 2% and then closed down to 2% ish during the day. And the NASDAQ actually closed right around flat.
Now, there were a lot of moving parts of the last couple of weeks and certainly just over the last 48 hours. There’s a lot of things that the Federal Reserve is doing that are fantastic, that are going to help the economy. There are a lot of things that Congress can do to help the economy as well with the stimulus bill, but this is about changing the mindset of the market and the narrative that it was telling itself that everything is horrific, everything is terrible, everything’s going to zero essentially, and pure panic that had been ensuing with this really strong negative narrative. That seems to be abating right now. I think there’s so much liquidity from the federal reserve that’s being put in. There’s a lot of optimism from this stimulus package that’s going in.
Optimism on Coronavirus?
There is some optimism on the coronavirus that we’re seeing. Things like test kits get out to the places where they need to go. We’re seeing a CDC approved test that will only take 45 minutes to give you an answer. That’s all part of this process. But I’ll also say too, and I want to point out what president Trump said yesterday, and he said, “This economy is not built to be shut down.” In other words, we have a services economy as opposed to China’s mainly manufacturing based economy. What does that mean? Well, if you shut it down, you can’t reboot it easily and get the same level of economic growth you had. You’re going to permanently lose that economic growth over that time frame that you shut it down because why? Just as an example, if we’re a services based economy and part of those services are going to a bar or restaurant, when it does open back up, you’re not going to go to that restaurant and order two meals. No, you’re going to order one. So you never recoup those lost services and spending on those services that you have when you shut down.
Will Trump End the Shutdown?
So here’s how I would look at what’s going to happen with president Trump and the shutdown that’s occurring. Number one, he’s going to open it up sooner than most people want him to. You can expect that to happen. Number two, this is all about managing the infection, not about eradicating it. Keep that in mind. So we’re just trying to get through a period where we are reducing the peak or flattening the curve according to Dr. Fowchee over at the CDC and others, and then it’s probably going to be a little bit more elongated in that curve basis. But what we want to see is exactly what we’re starting to see already. Test kits getting out, capacity being built in the hospitals, and medical equipment getting out to these hospitals, respirators, but also the protective gear for those people.
And once you do that, then you stand a much better chance at managing this outbreak than you would otherwise, right? And that’s what we’re shooting for, just to be able to manage it better. And of course, we want the therapeutics to go with that so that we can reduce the symptoms of people and get them back to better health faster. That’s where we’re going with this. I firmly believe that we cannot shut down the US economy for longer than three weeks. Even three weeks is just close to borderline catastrophic for the economy and for a lot of low and middle income workers and not only will they lose their wages, but their health will start to go down just as everyone else’s will as well if we keep this going.
Will the US go into a recession?
Because here’s what will happen. Right now, we’re in a liquidity crisis. That’s why you’re seeing a lot of focus in the stimulus plan about getting loans out, SBA loans and having the federal reserve pump a lot of liquidity in to help banks and so on. We want to get lending out to those businesses that have been shut down to deal with the liquidity crisis. The next step in this though, it will evolve into a solvency crisis as these firms shut down, go out of business and stop paying their bills like, I don’t know, commercial real estate mortgages that they have. That’s going to happen. You can imagine the cascading effect that will occur as you move from a solve… I’m sorry, a liquidity crisis into a solvency crisis. And if you have a solvency crisis, that moves very quickly into a financial crisis because then banks won’t be able to be paid, new lending won’t happen and you’ll quickly move into a depression. That is what’s coming if we keep this economy shutdown as long as our medical professionals want us to.
So there’s a real battle that’s going on between economists and medical professionals. This is a question as a society of how we want to manage this crisis. And my guess is that the president will announce that he’s going to end the shutdown sooner rather than later. So we all need to start to think about, well, what does that mean for businesses? How can businesses adjust to this new paradigm of how do you do business with this coronavirus around and what do you need to do to protect your workers, keep them safe? How much longer do you want to have them from working from home? But I will tell you, this is part of the process by which you heal, not only on the infection side, on the disease side, but also on the economy side.
Okay, just wanted to end it there and let everybody know that it will likely be a very good day in the stock market. Keep your hopes up, keep your spirits up. I’m Andy Busch, economist, market expert and trying to move my clients from gas to confidence and telling you some good news today.