The US Senate has agreed on a massive $2 trillion stimulus package that has sent markets surging, but they might be out of ammunition.
Republican Mitch McConnel described the package as a “wartime” level of spending for the government, and he’s not wrong. The package includes income support of $1200 per adult and an increase to unemployment benefits, and around $500 billion for bailouts of businesses impacted by the coronavirus, including airlines and companies “critical to maintaining national security”.
All up, the stimulus is larger than similar measures deployed during the GFC.
Markets surged ahead of the announcement, with the S&P 500 enjoying its best day since 2008. But it’s still not clear whether it will be enough.
“Given this was likely the last major policy innovation from stretched policy makers, the question is what comes now?” said Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors.
“Will this be enough to send markets higher or will the focus return to the viral data and the uncertainty of the eventual economic impact? Incremental policy news is unlikely to have the same effect going forward.”
A massive monetary response by the Fed over the last two weeks – including the announcement of so-called ‘QE infinity’ – has also bolstered markets, but a lack of any certainty on when the impacts of the virus will end is likely to cause further market volatility
“Investors need to remain vigilant about how the growth rate of new cases develops and how governments respond going forward,” Mr Blackbourne said.
“While policy looks to have lessened the economic pain, only better health data can make it go away.”
Others are also sceptical of how much impact the unprecedented stimulus could have.
“By any measure this is a huge stimulus package,” said Aberdeen Standard Investments senior global economist James McCann.
“One thing that it cannot stop is the recession that is coming. But it should hopefully act as a firewall to slow the spread of this crisis through the economy and prevent it from seizing up the financial system.”
The long-term economic outlook depends on how soon the United States can reopen for business. While President Trump is pushing for that to happen sooner rather than later, he risks a politically disastrous backlash if it results in the loss of more lives.
“If the economic data in coming weeks is much worse than current predictions, this package could end up not being enough and Congress will find itself back at square one,” Mr McCann said.
“We’ve already seen unsettled markets overnight off the back of fears about the speed of the pandemic’s spread. The challenge for the stimulus package is keeping pace with the pandemic.”