Wall Street shows signs of nervousness with the so-called Covid-19 rally, where the Dow Jones Industrial Average [DJIA] bottomed March 11 at 21,200.62, down over 8,300 points from its Feb. 12 record high of 29,55142, or 39%. Since then, the DJIA has rebounded over 6,000 point to end today’s trading session down 282.31 to close at 26,989.99 on news the Federal Reserve Board’s Open Market Committee [FOMC] would leave rates at zero-to-a-quarter percent to the next two to three years. While nothing’s definite when it comes to the economy, certainly interest rates, Wall Street digested Federal Reserve Chairman Jerome Powell’s statements as bad news for U.S. GDP growth. U.S. GDP is expected to drop 6.5% in 2020, then expected to rebound 5% in 2021. When you consider that another 1.55 million are expected to file for unemployment his week, it’s not good news.
Over the last three months, over 42 million U.S. workers filed for unemployment benefits since the World Health Organization [WHO] announced March 11 the coronavirus AKA SARS CoV-2 or Covid-19 global pandemic. It’s no accident that Wall Street had been selling off since Feb. 12 on hints that deadly infectious disease crisis could upend the global economy. Even though China and the WHO waited months before admitting the obvious, it’s no accident Wall Street rebounded March 11, the day WHO’s Director-General Tedros Adhanom Ghebreyseus declared the global pandemic By that time, Wall Street’s sell-off was well underway with the Dow losing 39% of its value from Feb. 12 to March 11. Today’s FOMC said that they’d leave the benchmark Federal Funds Rate alone for the foreseeable future, signaling more bad news for U.S. GDP. When the Fed keeps rates at zero, things aren’t good.
Powell expects the unemployment rate to continue in the 15% range for a while, hoping it could end 2020 near 10%, a staggering figure when you consider the rate was 3.5% before the Covid-19 meltdown Feb. 12. Powell has no crystal ball but doesn’t think things will get much better for a while, leaving long-term investors having second thoughts. Price-to-earnings multiples have gotten out-of-whack, suggesting that the Covid-19 rally is about to end. How far the market drops from here is anyone’s guess. What’s known for sure is that the economy isn’t bouncing back anytime soon. Expecting a V-shaped rally where Wall Street returns to pre-Covid-19 levels is unrealistic considering the record level of unemployment, with foreclosure and bankruptcies on the rise. Powell said the Fed would limit asset purchases, a new round of Quantitative Easing for now.
Investors have watched money-market yields consistently drop as rock-bottom interest rates appear here for the foreseeable future. Powell didn’t waste any time slashing the Federal Funds Rate to zero March 15, only four days after WHO announced the global pandemic. While the country has opened up for business, it’s going to take time for a skeptical public to get back in gear. With so much unemployment, Powell doesn’t see a rebound in retail sales or the travel industry that’s been put under a dark cloud due to the coronavirus crisis. Restaurant, travel and hospitality industries could take years to return to normal, keeping U.S. GDP in recession for the foreseeable future. Dropping 282.31 points today, Wall Street hasn’t begun to price shares more realistically, as Tesla Inc. hit the unthinkable $1,025.02, up $84 a share. Knowing today’s recession, there are real downside risks.
Based on weakness in the overall economy, Powell indicated that rates would likely stay at zero for the next three years. “Even though today’s FOMC meeting was somewhat of a placeholder until more meaningful choices are made in the next few meetings, the outcome was dovish nonetheless,” said JP Morgan economist Michael Feroli wrote in a note. Feroli sees interest rates staying at zero for the next two-and-a-half years or longer, signaling to markets that the economy would stay in recession for the remainder of 2020. Upcoming FOMC meetings would deal with bank liquidity, a problem when more businesses and individuals face bankruptcy. Equities started to sell-off triggering the possible end to the Covid-19 rally where there’s no fundamentals to justify the steep rise in share prices. If unemployment continues to rise, corporate profits and earnings will drop.
Looking at a period of sluggish growth, the Fed set monetary policy to reflect the decline in U.S. GDP. No matter how low the rates, Congress may need to pass another stimulus package to keep the ball rolling. Monetary and Fiscal policy must work hand-in-glove if it’s going to improve economic growth. Monetary policy without Congress setting more stimulus in fiscal policy won’t galvanize the economy. One thing the Fed and Congress don’t want is what happened to Japan 30 years ago to present, where economic growth flat-lined, unable to grow GDP. Since the 2008 Financial Crisis, where former Fed Chairman Alan Greenspan called it a rare financial panic, the economy has barely been able to attain 2% growth. Trump hoped he could do things differently, getting an annual growth rate of 4%. Now he faces a protracted recession potentially upending his chances for a second term.
