It should come as no surprise that our politicians failed to compromise on a new bail-out package this week. It is symptomatic of a country that suffers from a great philosophical divide. The only entity that investors can truly believe in is the Fed. Keep the faith.
Chairman Jerome Powell, in his Thursday press conference after the two-day Federal Open Market Committee meeting, said the path forward is “extraordinarily uncertain.” As such, our central bank will remain accommodative, he promised, which means the financial markets will continue to be supported going forward.
Readers should remember that. Over the long term, I plan to remain constructive towards the stock markets. However, in the short-term, we need to contend with a number of negatives.
The unemployment numbers are going up, not down. Economic data may also weaken during the next few weeks. You can thank those states that ignored expert medical advice and reopened their economies for that. As a result, businesses have had to cancel, or slow their plans to reopen some state economies. And now those COVID-19 hot spots appear to be spreading and moving toward the Midwest. I expect this trend to continue.
And while the numbers of cases and deaths (more than 151,000) continue to climb, the Republican’s answer is to announce a $1 trillion rescue package. The centerpiece of their legislation is focused on protecting businesses from lawsuits by employees who sicken and/or die by coming back to work and extending the PPP benefits to businesses.
The Democrats want a $3 trillion package which focuses on the unemployed and additional funds to state and local governments. As of this writing, the parties remain far apart. In the balance are millions of Americans who will be facing eviction notices with reduced unemployment compensation and no job prospects.
All but the most conservative economists believe that the $1trillion plan offered by the Republicans is woefully inadequate. There is also no evidence whatsoever that the Republican claim that the additional $600/week supplement in unemployment is encouraging workers to remain at home instead of looking for jobs that do not exist.
I am also quite concerned with the planned re-opening of the nation’s school systems. My recent column, “How much are your kids worth,” outlines the horrible choice parents in America have to make in the next few weeks.
The risk I see is that, like the push to re-open states prematurely, school re-openings may follow the same path and backfire (as it has in many other countries). Children in classrooms might become “super spreaders” of the virus, infecting themselves, their parents, grandparents, along with their cities and states.
I warned readers two weeks ago to prepare for some volatility in the event that Congress failed to act before the end of the month. That prediction has come true. The longer politicians continue to procrastinate, preen, and pose for the cameras without delivering another fiscal stimulus package, the longer financial markets will continue to gyrate. Since market participants have already priced in another stimulus package, the failure to pass this legislation would trigger a market decline. Readers should also remember that the months of August and September have not treated investors kindly in the past. Let’s hope the politicians don’t make this a self-fulfilling prophecy.