A great fiscal boost rallies markets but it cannot solve all the virus-created problems, writes John Redwood.
As expected, the US Senate reached agreement between the parties for a $2 trillion (£1.6 trillion) fiscal stimulus package on Tuesday, which gave the markets a big boost.
Democrats allowed substantial funds to be available for business through a $500 billion fund for industries, cities and states, with a $367 billion loan programme for small business. They also accepted the US president's idea of sending $1,200 to most Americans and $500 to most children. In return, the Republicans accepted a substantial increase in unemployment insurance, granting $600 a week more for four months to those laid off and an additional £150 billion for state and local purposes. The money for industry includes $50 billion for passenger airlines and $8 billion for freight airlines.
This vast sum is 10% of GDP, but it is not out of line with the magnitude of the hit that the US economy is now experiencing given the widespread closures, soon to be followed by lay-offs of employees.
Because the legislation has been cobbled together as a political compromise at speed, there will be difficulties with some of the detail. The intention is to set up an Independent Inspector General and Oversight Board to provide some accounting discipline, and there needs to be the translation of legal text into workable programmes so that companies and people can apply and receive their cash. There are likely to be delays and teething problems, which will mean more people end up unemployed as cash-strapped companies set about cutting liabilities.
However, this package does not resolve the underlying problem. That remains the growing spread of the virus and the continued policy advice that the only way of responding is an ever stronger and longer lockdown of much of the economy. Donald Trump tried to spin it more positively by suggesting that the US can get back to work from 12 April, but the epidemiological and policy advisers do not think that is realistic.
Elsewhere, people are talking of it taking many weeks before the all-clear can be sounded and there can be progressive lifting of the restrictions. If controls were lifted from mid-April, then economies could make a rapid recovery, but if most or all of the controls last on into early summer, more capacity and income will be lost and more businesses will be badly impaired.
Yesterday, news spread of the work of the Oxford University Evolutionary Ecology of Infectious Disease team suggesting that the virus may have been in the UK since early January, and possibly half the population has already had a mild form of it and may now have resistance to getting it again.
The UK government has worked quickly on getting a test for antibodies in the blood of people who may have had the disease and hopes to be rolling out those tests soon. Only when we know the state of the population at large, rather than just a selection of those with symptoms who have been tested for the disease, will we have more accurate figures to adapt policy.
The Imperial College UK work that currently drives the policy response assumes later arrival and a faster build-up of bad cases, and assumes that most of the population has no immunity to the virus. For the time being, policy worldwide is being guided by Imperial College-style work.
The World Health Organisation believes that this is a dangerous and fast-growing threat to most countries, requiring a long shutdown to purge or delay it. We need to watch this professional dispute, as it could have important bearings on how long restrictions remain in place for most people. The world is watching Italy in the hope that they are now witnessing a sustainable reduction in the growth rate of cases, to be followed by a downturn as a result of their very tough measures. If it works there, it will reinforce tougher and longer restrictions elsewhere, but will start to set an end date to the closures, which will be welcome.
Central banks and governments have now done most of what they needed to do to limit the economic damage the anti-virus policies create. They have battled the markets back to some two-way business and have created a lot of extra liquidity. Assuming that we are still in for a couple of months of bad news with lockdowns and evidence emerging of the economic damage, the rally is a good opportunity to remove from portfolios those shares and sectors most damaged by the current shutdowns.
Many companies prevented from trading will have to stop paying dividends, cut capital spending and also may lay off people. Less risk after this rally is sensible. A general buy signal awaits a change of mood to think that the period of damage is not too long, with the hope of restoration of normal conditions later this year, with many companies surviving to enjoy the recovery.
The crisis will increase market share for all digital-based solutions, so where a portfolio needs risk assets it is more reason to accentuate digital revolution companies. Some of these, along with food manufacture, food retail and medical companies, are experiencing demand surges during the shutdown. Many digital companies will expand market share faster during this period when traditional rivals are prevented from trading, and they will keep some of this extra market share when things return to normal. Cash remains crucial to businesses at a time when much turnover has been cancelled.
John Redwood is chief global strategist for Charles Stanley.
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