Stocks have staged one of the strongest rallies ever since the S&P 500 Index’s bear market low on March 23. Some, including LPL Research, are worried that the rally may have come too far too fast given the economic realities facing us right now. This disconnect has many investors scratching their heads.
Heightened uncertainty related to the pandemic makes it nearly impossible to predict where the markets may go from here. But one thing we do know, as we have pointed out in our Road to Recovery Playbook, is that the massive policy response has helped boost confidence for consumers, businesses, and investors, and is one key reason for stocks’ recent strength.
“The responses from policymakers to combat the impact of COVID-19-related lockdowns have been swift and bold,” noted LPL Financial Equity Strategist Jeffrey Buchbinder. “At more than 22% of gross domestic product (GDP) in 2020, the amount of stimulus from Washington, D.C. and the Fed is four times the stimulus response in 2008 at 5.6% of GDP. The total stimulus since March including 2021 at 24.6% of GDP is well ahead of the 16.6% for the total of the entire financial crisis and we may not be done yet.”
The amount of stimulus during this crisis compared with the 2008-2009 financial crisis is shown in the LPL Chart of the Day.
Congressional leaders are wrangling about what another package might look like. The April unemployment rate which will be released tomorrow and is likely to exceed 15%, may be a catalyst for action. A proposal from House Democrats could come as soon as this week that could approach the size of the CARES Act. The package may include aid to states and municipalities, more funding for the healthcare system, and extended unemployment benefits. Infrastructure spending may be put off but remains on some wish lists.
Payroll tax cuts, support for the oil and gas industry, employer liability protection, more aid for small businesses, and regulatory changes to encourage US companies to bring their supply chains back to the US are among the items receiving support from Republicans and the Trump Administration.
We would prefer that the stock market stand on its own feet and not be so reliant on stimulus. In a perfect world, we would not be adding another $3 trillion to the national debt to fight this horrific virus. But the alternatives both in terms of the human loss and economic damage are far worse.
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