- Investors are happy with the Federal Reserve's open-ended QE program.
- Initial encouraging signs from Italy and fiscal stimulus are also contributing to a better mood.
- However, this bear market has already seen surges, and the bottom may have to wait.
- There are three indicators that could provide a better indication of the bottom.
Is there a light at the end of the tunnel? It may be the headlights of a truck coming to run everybody down. Stocks enjoyed a double-digit surge on March 13 – the best since October 2008 – only to resume its drops afterward as the coronavirus crisis continues. Returning back to the Great Financial Crisis, the bottom was seen only in March 2009.
It is essential to remember that bear markets consist of high volatility, also to the upside. How will we know when stocks bottom out? Recent developments provide some hope, but most likely fall short. The latest rally originates from the Federal Reserve's open-ended QE program, optimism after Italy reported the second consecutive day of fewer Covid-19 deaths, and hopes for a massive stimulus package from the US.
However, we have seen this movie before. The Fed's "nuclear option" was only one of many emergency moves, Italian numbers have fallen, and Congress has already approved coronavirus aid packages
Things may be advancing in the right direction, but perhaps not enough to say with some confidence – as picking a bottom is almost impossible – that the worst is behind us.
Here are three factors that could provide investors a better footing:
1) Spain flattening the curve
China has halted the spread of coronavirus using drastic measures, but it used draconian shutdown and surveillance measures. Italy is the worst-hit country in the Western world and the first to impose lockdowns in early March.
One Western country does not make a trend. Spain followed Italy with a nationwide shutdown and has yet to see an improvement. Once the eurozone's fourth-largest economy follows the area's third-largest in "flattening the curve," investors may begin seeing a trend of how the vast economic price is bearing fruit.
Does two make a trend? Not yet, but it would be the first hint, and it may come sooner rather than later.
2)) Italy considering removing restrictions
After hopefully seeing success with halting the spread of the disease, the next step is removing travel restrictions. China is doing it gradually, with the first easing in Hubei coming on March 23 and the second one due on April 8.
As mentioned earlier, China is not easily comparable with Western countries, and markets would want to see something changing in Italy. Why? That would allow calculating how much time it would take the world – and most importantly, the US, the world's largest economy – to get out of the economic paralysis.
Italy's lockdowns are due to expire on April 3, but it has recently tightened the limits on movements and shut down non-essential factories. There is a good chance that the country extends the lockdown beyond the current end-date, as Spain did.
However, investors may begin buying before restrictions are lifted – but immediately when reports out of Rome suggest that the government is moving towards such a decision. That would also provide hope of getting out of the economic misery.
It is essential to note that after allowing people to move more freely, coronavirus may spread again and may force tighter measures. However, the first sign of hope could be the trigger. The second wave of Covid-19 patients would already be confronted with more experienced medical workers, adequate equipment, and potentially better care.
3) Open-ended US fiscal move
One trillion dollars? Two trillion? The sums that are thrown around on Capitol Hill are mind-blowing – yet they are finite. In order to wow markets, politicians on both sides of the aisle would need to follow the footsteps of the Fed – announce no limits to their support of the US economy.
What can they do? There are examples to follow from other countries. The UK is planning to pay 80% of the salaries or people not working due to coronavirus-related measures.
Denmark has taken a leap forward – all non-essential workers have been sent on a paid leave for three months. The Nordic country will pay most of the salaries of everybody deemed non-essential. Nobody will lose their jobs. That may be a solution suitable for a small, wealthy country, but the US is the world's most prosperous, and everything is possible.
Even if America does not go the Danish way, any pledge nearing unlimited and patient support can provide a cushion and help near the bottom. The Fed is there to pay the bill, and the government should lean on it.
President Donald Trump's impatience with lockdown measures can trigger a devastating second wave of the illness, making each perceived bottom in markets only a prelude to the next downfall. Moreover, it cracks confidence of winning the disease and returning to a healthy economic life.
It is hard picking bottoms in markets, especially in an unprecedented time like with the coronavirus pandemic. Nevertheless, there is a good chance that the bottom is still not here, and the three potential developments listed above could provide a better indication of hitting the lowest point.
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