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Almost mid-2020, one of the many ironies of the year is that its number is associated with perfect vision. Just as no one could have foreseen the coronavirus calamity when the year began, the view into the second half remains hazy.
Optimism about a V-shaped recovery, fueled by unprecedented fiscal and monetary stimulus policies and a reopening of state economies, is challenged as new Covid-19 infections rocketed to a record nearly 40,000 cases on Thursday. As a result, the stock market rebound reversed, with major averages suffering their second weekly loss in the past three weeks, ranging from 1.9% for the Nasdaq Compound to 3.3% for the Dow Jones Industrial Average.
Two events last week exemplify the impact that massive government aid policies have had on markets and the economy.
American Airlines Group (ticker: AAL) leveraged capital markets fueled by Federal Reserve asset purchases, which spilled over to corporate debt and exchange-traded funds along with customary mortgage securities from the Treasury and agencies that started at the beginning of the quarter. Central bank support to the credit markets was critical in driving the rallies in the equity and debt markets, allowing Americans to sell $ 1 billion of common stock and $ 1 billion of convertible securities along with $ 2.5 One billion five-year bonds priced at just over 12% (Both converts and promissory notes traded well below their issue prices at the end of the week, reflecting the massive sale of risky assets) .
Additionally, American is seeking a $ 4.75 billion government loan under the Cares Act, the $ 3 trillion measure to provide relief from the shutdown, guaranteed by its loyalty program.
The Care Act also threw a lifeline at American households, whose spending soared a record 8.2% in May, the Commerce Department reported Friday. Households were able to use stimulus checks to increase April personal income by 10.5%.
Those Uncle Sam payments were exceptionally generous, including an additional $ 600 in unemployment benefits, equal to 134% of the median income that replaced and doubled the previous income for one of the five beneficiaries, according to a University of Chicago working document.
However, these pandemic aid payments will expire in late July, unless Congress agrees to extend them. At the same time, state and local governments face a huge fiscal vacuum left by the effects of Covid-19. New York Mayor Bill de Blasio warned last week of conducting 22,000 municipal layoffs to cut the budget by $ 1 billion.
While the pandemic has been a one-time event, one feature of past economic and market crises has been repeated: the unmasking of financial fraud. The wrongdoer for this cycle was Wirecard (WDI.Germany), a German fintech, who filed for insolvency after revealing that 1.9 billion euros ($ 2.13 billion) in cash probably did not exist. So Wirecard teams up with people like Bernie Madoff and Enron, whose frauds were exposed by previous bears.
The question for the markets is whether the Fed’s continued monetary contribution will be enough to offset the apparent stagnation, or even reversal, of the reopening of the economy. That adds to the uncertainty about fiscal policies. At the federal level, another package totaling perhaps $ 1.5 trillion more could be agreed after the July 4 congressional recess.
But in the absence of help from Washington, states, cities, and counties would be forced to cut budgets and payrolls with unemployment still in its teens. Reflecting this, Nomura economists expect a 1.5 million increase in the June non-farm payroll report slated for release Thursday (a day earlier due to Friday’s Independence Day celebration), which It consists of a 1.6 million increase in private payrolls and a 100,000 drop in government payrolls due to the strain on pandemic budgets.
Then there is the small matter of what could happen next November. Regardless of one’s policy, the reelection of President Donald Trump and the Republicans who retain their majority in the Senate are considered more positive for the stock market. Former Vice President Joe Biden, the alleged Democratic challenger, favors tax increases, including corporations. While polls give him a double-digit lead, they also showed Trump behind four years ago.
No wonder the view forward is anything but clear.
Read more Up & Down Wall Street: After the huge stock quarter, it’s time to cover the market
Write to Randall W. Forsyth at [email protected]
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