Stocks Soar on Hope of Stimulus Deal Breakthrough

By:
Chris Gaetano
Published Date:
Mar 24, 2020
stock-exchange-3972311_1920

Traders are hoping that the impasse in Washington over the proposed relief bill will soon be over and that real action will be taken to combat the epidemic's economic impacts, leading major indicies to spike in the morning hours, according to MarketWatch.

As of midday, the Dow Jones Industrial Average had skyrocketed by1,400 points, making back all of yesterday's losses and then some. The S&P 500, meanwhile, had gained 7 percent, or 155 points, while the Nasdaq had gained 6.3 percent, or 431 points. Markets yesterday saw a similar (though weaker) morning rally on the same expectations of a relief bill coming out, but later deflated on news that lawmakers were still in negotiations. Should today end with a similar lack of government response, these gains might disappear.

However, it would appear that lawmakers are actually very close to a deal, with Senate Majority Leader Mitch Connell (R-Ky.) saying that they were at the 5-yard line, according to the Wall Street Journal. While both Democrats and Republicans acknowledge the importance of a stimulus package coming out as soon as possible, they have clashed on details such as unemployment insurance, paid sick leave, and oversight of entities set to benefit from $500 billion set aside for distressed industries, which Democrats characterized as a "slush fund."

So far, said the Journal, Republicans have agreed to more controls on the $500 billion industry package, and are likely to also expand aid to hospitals and health care workers by an additional $25 billion. However, in the event that the Senate still cannot reach a deal, Bloomberg is reporting that House Speaker Nancy Pelosi (D-Calif.) is proposing a more than $2 trillion spending package of her own, which would, among many other things (the bill is 1,400 pages long), force lenders to grant a temporary reprieve from mortgage and car payments and credit card bills, order the Federal Reserve to provide loan servicers with liquidity to allow borrowers to stop paying their mortgages for up to 360 days, give public housing residents a temporary reprieve from paying rent, give student loan borrowers $10,000 of debt forgiveness, ban foreclosures and evictions, and halt all negative consumer credit reporting. Bloomberg noted, however, that the House is unlikely to meet to actually vote on the bill, meaning it's more a list of what the Democrats would ideally like to see in the Senate bill.

Markets have been extraordinarily volatile over the last few weeks, as people reacted to news about the pandemic, with swings between extreme highs and lows hour by hour, day by day, and week by week. Last week alone saw the Dow go from losing 2,997 on Monday to gaining 1,000 on Tuesday, losing 1,300 on Wednesday, gaining a modest 188 points on Thursday, then losing 913 points Friday.

The bond market, meanwhie, likely wishes it had the volatility of stocks because its own state has been a steady downward spiral, as credit dries up and new debt issuances slow to a trickle. This has led the Federal Reserve to take the unprecedented action of directly intervening in sectors it has never directly acted on before, such as the corporate debt market. Despite some seeing this as a full nationalization of the bond market, traders nonetheless hailed the move, which has bolstered funds, encouraged new debt issuances, and overall eased credit access.

However, much work remains to be done, as a great degree of turmoil continues to work its way through the credit market. Mortgages, for example, are the worst they have been in decades, as good loans threaten to go bad and redemptions of mortgage-backed securities climb. Noted real estate investor Tom Barrack warned that the country's housing market is facing a complete collapse which would then, like in 2008, create a domino effect that would impact the entire economy.

India, meanwhile, was the site of more ominous news yesterday, as sales of sovereign bonds slowed to literally a 450th of their normal levels (usually the country sells about 450 billion rupees of bonds per day, but yesterday it sold only 72 billion). Sovereign bonds are premised on the idea that so long as the country continues to exist, bond holders will continue to be paid, and it is only in extraordinary situations that this is ever questioned. This was the case, for instance, during the Greek sovereign debt crisis or Argentina's numerous sovereign bond defaults.

The junk bond market, meanwhile, has failed to respond to the Fed's recent actions, according to the Reuters. Funds containing these riskiest of bonds continued to fall even after the central bank's announcement, reflecting major indiices that track investor sentiment in this sector. Over the past decade, fueled by ultra-low interest rates, companies have been gorging themselves on easy credit, many of whom have come to rely on it for their continued existence. With junk bond sales having been effectively frozen for weeks, S&P has projected a default rate of 10 percent, up from just 3 percent in December.

The junk, or "high yield," debt market is currently about $1.5 trillion. However, the Journal is reporting that bond downgrades of corporate and sovereign debt has already begun, which has already moved from previously-safe investment grade debt into junk territory. 

With bond issuances becoming more difficult, more firms are turning to bank financing to meet their credit needs, with a growing list of companies announcing they are drawing down the entire balance of rotating loans that are meant to be taken a little at a time. General Motors is the latest, the company taking on $16 billion worth of bank credit at once in order to survive; it joins other firms like Boeing and Hilton which have drawn down all, or most, of their available credit.

Click here to see more of the latest news from the NYSSCPA.