Posted in: Market NewsOp-ed
Published:
March 11, 2020 1:30 AM UTC

Dow Needs More than Fiscal Stimulus Hopes to Claw Back Brutal Declines

The Dow Jones rallied Tuesday on fiscal stimulus hopes, but that won't be enough to launch a full-blown relief rally. At least, not until coronavirus is fully contained.

  • The Dow Jones rallied on Tuesday after its worst day since the financial crisis.
  • The rebound in U. S. stocks followed a proposition of a payroll tax cut by Trump to offset coronavirus.
  • The U. S. government should take measures to prevent and fight coronavirus.

U. S. stocks rebounded Tuesday, one day after their largest drop since October 2008.

The Dow Jones jumped 1,167.14 points, or 4.9%, to end the day, partially offsetting the previous day’s 7.8% plunge. Optimism about a fiscal stimulus intended to boost the U. S. economy fueled the rally.

The Dow Jones surged on Tuesday but remains well below last month’s historic high. | Source: Yahoo Finance

President Donald Trump has said he’s discussing with members of Congrress about a payroll tax cut or relief. He has criticized the Federal Reserve for having cut interest rates too late.

Source: Twitter

Fiscal Stimulus Isn’t The Best Way To Fight Coronavirus Recession

Fiscal stimulus might not be the best measure to fight a coronavirus-induced recession. It will take more to launch a relief rally in the stock market that will last.

We don’t know how bad the economic shock caused by the coronavirus is going to be, so it’s hard to say what effect fiscal measures are going to have on the economy. Plus, it takes some time for any economic stimulus to have an impact. Indeed, it can take a year before we see a measurable effect on the economy.

We cannot compare a recession caused by coronavirus to the recession of 2008, as the virus has fundamentally different economic effects. The effects of the 2008 recession were demand-side issues. There were not enough buyers and too many sellers, as people lost their jobs and spent less.

Fiscal stimulus is meant to boost demand, while coronavirus is causing a supply problem. If the coronavirus disrupts global supply chains, people might have to deal with a shortage of products, especially essential goods like hand sanitizers and tissues.

Putting more money in the pockets of all Americans, either by reducing payroll taxes or by sending checks, should boost the economy faster than cutting interest rates. But that would be the case if consumers can buy goods and services they need.

Given the already high national debt and the rising deficit of the United States, the White House and Congress should be careful about their spending to avoid a recession caused by the coronavirus.

Other Actions Need To Be Done To Fight Coronavirus

The U. S. government needs to take additional steps to boost confidence and avoid a coronavirus-induced recession. Fiscal stimulus is not enough. Slowing the spread of the virus is what’s most important right now.

A payroll tax cut won’t be of much help for people who lose their jobs, go bankrupt or who are retired. If the virus continues to spread, people will fear going out of their house and will spend less.

Governments need to take more preventive measures to contain the virus. Enterprises should allow workers to work from home as there is less risk of contaminating people that way. Infected people should be placed in quarantine and stay at home until we are sure they present no more risk of contamination.

Companies should give paid leave to sick employees, so they don’t run out of money. People should avoid crowds and gatherings to limit the risk of spreading the virus. Travel to and from infected areas should be restricted.

It’s also crucial to find a treatment or a vaccine as soon as possible. Governments should be working hand in hand with scientists to help them find a solution. It should also provide the health system with every resource it needs to fight the coronavirus. Only once the virus is contained can economic life return to normal.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.

This article was edited by Sam Bourgi.

Last modified: March 11, 2020 12:55 AM UTC

Stephanie Bedard-Chateauneuf @SBChateauneuf

Stephanie has been writing about stocks and financial markets for several years. Based in Canada, she has written for The Motley Fool and Seeking Alpha. She received an MBA in finance and worked for National Bank of Canada. Email: stephanie.chateauneuf@gmail.com

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