In today’s episode, we talk about the new $800 billion U.S. stimulus.
Is it enough to put a floor under the market and offset the virus’ hit to the economy?
Market Not Baking in Full Impact of this Virus
Market volatility continues to set new records as the level of uncertainty around the virus reaches a peak. However, even with all this volatility, the market isn’t pricing in the full impact virus-related shutdowns could have on the global economy.
The market may be down 29% since the virus began to spread globally, but this was from all-time highs.
Looking at the trailing price to earnings ratio of the S&P 500, valuations remain well above where they bottomed in 2009.
This tells us the bull market forever mentality is still hanging around in the markets.
Once the true economic impact of this virus becomes clear, we think the market will readjust lower to price in the real impact on the economy.
S&P 500 Trailing Price/Earnings Ratio Still Elevated
Big Stimulus Numbers but Is it Enough?
Yesterday the government announced $850 billion of stimulus, $800 billion for the average American and another $50 billion to bail out the struggling airline industry.
Of the $800 billion, $250 billion will be mailed directly to consumers in the form of a $1,000 check for every working American.
The sectors most impacted by social distancing and quarantines make up almost 20% of consumer spending, or more than $2.7 trillion dollars each year.
An $800 billion stimulus while a good first step, is definitely not large enough to make up for lost business and the financial distress that will quickly consume many small businesses.
$800 Billion Bailout Not Enough
Market Will Lead the Stimulus
We expect this is only round 1 of more government handouts to come and more than anything the stock market will make it so.
The market was up yesterday on the announcement of stimulus, but as investors realized the amount was just too small, the market reversed course and is down another 3%-4% today as we write this.
Without further stimulus, the market will continue declining as investors correctly price in the myriad of risks facing businesses big and small.
The market action will serve as a signal to the U.S. government that more stimulus is needed and they will listen.
Expect continued market volatility and larger and larger stimulus measures from the U.S. government.
Until the virus’s spread has peaked, the economy needs desperate help from government coffers to avoid even deeper job losses and a continued stock market selloff.
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