03/26/2020
Reports that Congress was edging closer to an agreement on a $2 trillion economic stimulus package sent stocks soaring on Tuesday this week. The S&P 500® index rose 9.4 percent, while the Dow Jones Industrial Average gained 11.4 percent, its single best day since 1933. Stocks added modestly to those gains on Wednesday. In the past two days, S&P 500 has rallied 11 percent from its low close on Monday, although it remains 27 percent below its February 19 closing high. The Chicago Board Options Exchange (CBOE) VIX index of implied S&P volatility remained elevated. In contrast, implied volatility in the U.S. Treasury market fell for the second straight day this week, and both investment grade and high yield spreads narrowed in response to the announced Fed initiatives and prospects for economic stimulus.
Municipal bonds rallied sharply as well.
 
Coupled with the earlier initiatives announced by the Federal Reserve, it is clear that Washington has gotten the message that the potential severity of the economic impact of the coronavirus calls for an overwhelming fiscal and monetary response. Late on Wednesday, the Senate finally approved the long-awaited stimulus bill, after a last-minute dispute over unemployment benefits. The House is expected to vote on Friday. The broad outline of the bill includes; $529 billion in relief for industry, including mid-size firms, in the form of loans, loan guarantees, grants, and investment in support of Federal Reserve facilities; $377 billion for loans to small business, forgivable with conditions; $300 billion for $1,200 checks to individuals with an income cap; $300 billion for employer payroll tax deferral relief; $250 billion for expanded unemployment insurance; $150 billion for state and local governments; and $100 billion for hospitals. Among other provisions, the bill includes a suspension of required minimum distributions and a deferral of student loan interest.

Time Will Tell Whether the Stimulus Package is Sufficient 

Whether the stimulus proves to be sufficient remains to be seen. That will depend on the severity and duration of the economic slowdown. That it is necessary and welcome, however, is not in dispute. Citing surveys conducted in 2018 and 2019, the Wall Street Journal reported that if revenue stopped suddenly, 21 percent of small businesses would not survive for even one month. Another 34 percent would only be able to survive for between one and three months. Among workers, 31 percent said they could not afford to miss even one paycheck before dipping into savings, if they had any, and another 20 percent said they could miss no more than one paycheck. Congressional leaders have indicated that additional legislative measures are already being considered, as the economy transitions from emergency to recovery. 

Economic Data Starts to Show the Impact of COVID-19; The White House Debates Next Steps 

The economic impact of the virus began to be reflected in the data this week. On Monday, the flash composite purchasing managers survey for March slumped to its weakest reading in ten years. Manufacturing contracted, but the rate of decline was not as severe as anticipated. Service activity, however, was far weaker than expected, reflecting the shutdown of travel and leisure activity. The results overseas were even weaker, especially in the Eurozone. U.S. mortgage applications for both refinancing and purchasing also fell last week by the most since 2009, as mortgage rates rose, and buyers had second thoughts. Today, the weekly number of initial jobless claims totaled 3.3 million, double the Bloomberg consensus forecast of 1.64 million. The size of the U.S. civilian labor force in February was 165 million, with 5.8 million, or 3.5 percent, unemployed. Today’s claims data implies a 2-percentage point rise in the unemployment rate. 

A debate is emerging in the White House between a desire among healthcare professionals to continue the effort to slow the spread of the virus through social distancing, and a desire among the business community to reopen the economy as soon as possible. The president has expressed a preference to have the economy restarting by Easter, just two and a half weeks away. With the number of virus infections rising exponentially, expect that debate to become more heated in the days ahead. According to the Johns Hopkins University Coronavirus Resource Center, cases in the U.S. have now risen roughly tenfold in little more than a week to over 69,000. 

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Individual securities referenced are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. 

The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.

The Dow Jones Industrial Average (DJIA) is likely the most widely known measure of American stock market indicators. The index is more than 100 years old, includes only 30 individual stocks and is comprised of the largest, most established firms across a broad range of industries. The DJIA is calculated based on share price – providing a greater weighting within the index to those companies with a higher share price. Due to the small number of issues contained in the index, it does not always provide the most accurate measure of aggregate stock market performance.
 
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

The purchasing managers' index (PMI) is an economic indicator that surveys purchasing managers at businesses that make up a given sector. The index is a measure of the prevailing direction of economic trends in manufacturing.

Past performance is not a guarantee of future results.

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