STOCK MARKET FORECAST: RECESSION RISK TO PRESSURE DOW JONES AS ECONOMIC COST OF CORONAVIRUS MOUNTS, WILL LIKELY TRUMP FED LIQUIDITY & FISCAL STIMULUS
- The stock market gyrated wildly over the last five trading sessions as investors try to ascertain whether fiscal stimulus and the FOMC can trump economic cost of the coronavirus
- Dow Jones price action printed its biggest weekly gain since the 1930s even though the major stock market index slipped 4% on Friday and remains down 25% year-to-date
- Recession risk looms large with the economy likely facing one of the sharpest and most abrupt downturns in modern history
The Dow Jones Industrial Average soared nearly 13% last week as stocks attempt to recover from their sharp selloff that ended the longest bull market in history. Stocks began to stabilize on the back of unlimited QE announced by the Fed earlier this week, and a $2 trillion fiscal stimulus bill just signed into law by President Trump, which both aim to offset economic turmoil caused by the coronavirus lockdown.
HAVE STOCKS & THE DOW JONES BOTTOMED OR IS THIS JUST A BEAR MARKET BOUNCE? (CHART 1)
In fact, the improvement in investor optimism, largely catalyzed by a tsunami of stimulus measures from the Federal Reserve and US Congress, helped the Dow Jones jump higher and notch its best weekly gain in decades. However, the Dow is still down by more than 20% from recent highs, and the major stock market index could face further downside considering the risk of recession that looms.
As markets try to strike balance between how deep the coronavirus recession will be with how quickly stimulus can hit the economy (and whether it will be enough to offset economic damage), more pain might be ahead for stocks. This is in consideration of dismal data readings that have only started to reveal the dire state of the economy.
RECESSION, CORONAVIRUS RECESSION SEARCH INTEREST AT PEAK POPULARITY (CHART 2)
Search traffic is at peak popularity for recession and coronavirus recession. Likely resulting from the coronavirus lockdown, this highlights the degree of anxiety felt by many Americans, which could weigh on their future spending habits and exacerbate downward pressure on the US economy. That said, business activity is already contracting at an alarming rate.
IHS MARKIT US PMI RECORD DROP IN SERVICES BUSINESS ACTIVITY (CHART 3)
In fact, the flash IHS Markit PMI report for March indicated that the US composite output index plunged to its lowest reading on record. The manufacturing and services sectors, which comprise roughly 11% and 68% of US GDP respectively, witnessed their sharpest declines since the global financial crisis. Amid widespread cost cutting and reduction in capacity, the latest Markit PMI report also indicated how firms have started to slash jobs. This is a trend that will likely accelerate as the coronavirus lockdown drags on.
CORONAVIRUS LOCKDOWN BREAKS US JOBS MARKET; INITIAL JOBLESS CLAIMS NOTCH UNPRECEDENTED SPIKE (CHART 4)
On that note, a record-smashing spike in jobless claims reported last week, which topped even some of the most pessimistic market estimates, emphasizes the unparalleled headwinds threatening the US and global economy. Recession risk stands to grow exponentially as the number of furloughed workers mounts – even despite the enormous $2 trillion coronavirus stimulus bill – seeing that the $1,200 cash windfall per adult likely pales in comparison to lost income from becoming unemployed.
CONSUMER SENTIMENT PRINTS BIGGEST DROP SINCE OCTOBER 2008 FINANCIAL CRISIS (CHART 5)
The deterioration in consumer sentiment is another gloomy economic datapoint underscoring the economic impact of COVID-19. As recession risk intensifies and the stock market sinks, consumer sentiment data for March recorded its biggest drop since October 2008, driven by the worrisome deterioration in both current conditions and future expectations.
Although massive amounts of fiscal stimulus and Fed liquidity have calmed market angst for now, further degradation in business activity, jobless claims and consumer sentiment could be imminent. Seeing that the aforementioned indicators likely reflect the ‘tip of the iceberg’ with regards to economic fallout from the novel coronavirus,the rebound just notched by the Dow Jones and broader stock market might prove short-lived. Consequently, prudent investors may want to err on the side of caution by adhering to strict risk management trading strategies and looking toward safe-haven assets in lieu of stocks.