Here’s a much-needed dose of good news for investors: Lawmakers in Washington have reached an agreement on a sweeping $2 trillion economic stimulus package that will help support companies and workers harmed by the coronavirus pandemic.
Anticipation of such a deal sent US stocks soaring on Tuesday, with the S&P 500 rising 9.4% — its tenth best day ever and strongest performance since 2008, according to Bespoke Investment Group.
But, as has become typical, stocks are struggling to hold onto their gains on Wednesday. European shares powered higher in early trading but have since pulled back.
Goldman Sachs told clients Tuesday that the “swift and large” global policy response could help steady markets — but commitments may need to get even bigger before that happens.
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The investment bank said that three other components are also needed to stabilize markets: A sign the infection rate is peaking, an indication the economic downturn may be slowing and cheap valuations. With the exception of valuations, we’re not quite there yet.
In the meantime, major risks remain — especially on the unemployment front. If joblessness shoots up, Goldman Sachs warns that companies could wind up short on cash as demand falters even more, raising the chances that the recession “becomes more entrenched.”
Andrew Hunter, senior US economist at Capital Economics, thinks the $2 trillion stimulus plan will help limit corporate bankruptcies and thus job losses.
But the research firm still sees the unemployment rate in the country soaring above 10%, and the economy contracting at an annual rate of as much as 40% between April and June.
Capital Economics also thinks that the US government will need to add to its $2 trillion efforts down the line.
“There is no reason to believe that Congress will now sit on its hands,” Hunter told clients. “Fiscal stimulus measures could easily be ramped up even further over the next couple of months as the economic damage becomes clear.”
