Wall Street closed its best week in 45 years on Thursday after the Federal Reserve launched its latest titanic effort to support the economy through the coronavirus epidemic.
Central bank announced plans to provide up to US $ 2.3 trillion ($ 3.5 trillion) in loans to households, local governments and businesses as country learns what economists say is the worst recession in decades. This is the latest unprecedented move by the Fed, which has rushed to ensure that liquidity reaches the sectors of the economy that need it after markets have been harassed by a wave of investors. who were withdrawing cash from the system.
The stock market is not the economy, and this distinction has become even clearer this week. The S&P 500 rose 1.4% on Thursday, the same day the government announced that 6.6 million Americans had applied for unemployment benefits last week as layoffs swept the country. For the week, the S&P 500 jumped 12.1%, its best performance since the end of 1974. The markets will be closed for Good Friday.
Equity investors are constantly looking for the future of the economy in a few months or more. From mid-February to the end of March, they lowered inventories by a third due to the imminence of a sharp recession, before the economy really started to crack.
In recent weeks, however, investors have pushed the market up more than 20% following massive aid pledges from the Fed, other central banks, and governments around the world, even as the evidence has grown. accumulate that fears of recession were premonitory. This week, some investors began to anticipate the possible reopening of the economy as the epidemic could peak or plateau in several of the most affected regions of the world.
“The market only focuses on the number of cases,” said Quincy Krosby, chief market strategist at Prudential Financial. “The question is when can the restrictions be lifted? This is what the market is focusing on, when will the United States open up again? “
The S&P 500 rose 39.84 points to 2,789.92. The Dow Jones Industrial Average added 285.80, or 1.2%, to 23,719.37, and the Nasdaq climbed 62.67, or 0.8%, to 8,153.58.
Many professional investors are skeptical of the recovery, saying there is still too much uncertainty. They say forecasts for a relatively rapid economic rebound are too optimistic, and the head of the International Monetary Fund said on Thursday that the world economy is expected to experience its deepest recession since the Great Depression.
Although it is hoped that a tray will arrive for infections in several hot spots, this is not guaranteed. Meanwhile, businesses continue to close, and one in 10 American workers has lost their job in the past three weeks.
“You usually have very strong rebounds, even in a bear market,” said Krosby of the markets where stocks fell more than 20%. “The question is whether we plan to sell in this rebound or not, or can we continue to profit from it.”
The big market gains this week were somewhat hesitant. On Tuesday, the S&P 500 registered an initial gain of 3.5% before disappearing in the last few minutes of trading. On Thursday, the index almost abandoned all of an initial 2.5% gain, reducing it to 0.5% before climbing again in the last trading hour.
This volatility became common in the markets at the end of each week recently.
“People are a little nervous about taking risks before the weekend, especially a 72-hour weekend,” said J.J. Kinahan, chief strategist at TD Ameritrade.
The afternoon swoon also coincided with a further sharp drop in the price of oil. US benchmark crude oil fell US $ 2.33, or 9.3%, to $ 22.76 per barrel after surpassing US $ 28 earlier, assuming large oil producers should announce a sharp reduction in production. Energy demand withered as economies closed to slow the spread of the virus and the world was flooded with oil.
Brent crude oil fell US $ 1.36, or 4.1%, to US $ 31.48 per barrel.
The huge Fed programs announced on Thursday affect large sectors of the credit markets, and if they continue over the long term, they could eventually lead to market bubbles.
But in the short term, “what the Fed is doing is great and helps the markets to function and provide liquidity so that investors can do what they need (and want) to do,” said Warren Pierson, deputy director of investments at Baird Advisors.
The programs even include bonds for companies that have sufficiently low credit ratings to qualify as “junk” or speculative.
Concerns have been raised about the skyrocketing corporate debt concentrated at the bottom edge of high quality “investment quality”. The impending recession could push much of this into “scrap” status, which would force many investors to sell it, as they are only required to hold high quality bonds. A leakage of these bonds could trigger sales in other areas of the market and cause further suffering in the economy.
Also in Fed programs, municipal bonds allow cities and state governments to raise funds. In normal market trading, 15 buyers may bid for a particular bond. But just a few weeks ago, there were 15 sellers for each buyer, according to Gabe Diederich, portfolio manager at Wells Fargo Asset Management.
All the selling difficulties have brought prices down more than they should otherwise, even for high quality bonds. This makes it more difficult for local governments to borrow.