The Dow Jones skyrocketed toward its second straight quadruple-digit gain on Wednesday as clarity about the U.S. government’s imminent fiscal stimulus package ignited a wild 30% bounce in Boeing stock.
But Dow bulls may be concerned that this is only a brief reprieve, because one of the top economists who called the stock market crash is warning against a dead cat bounce.
All three of the major U.S. stock market indices posted gains, but the Dow was the clear leader.
Oil managed a moderate 3.3% gain on the back of a smaller than expected build in U.S. inventories. But a massive supply glut is building globally due to Saudi Arabia’s price war with Russia.
The price of gold fell 1.5% as the Dow gained, while digital asset bitcoin hung around $6,600. Short-term Treasury yields dipped into negative territory.
Despite the rapid spread of the coronavirus in the United States and Europe, President Donald Trump continues to push for a resumption in U.S. economic activity. But this decision will ultimately rest with state governors.
Optimism about the U.S. response to coronavirus triggered the biggest single-day Dow Jones point gain in history on Tuesday, and risk-on sentiment held firm on Wednesday even as the U.S. case toll surpassed 61,000.
Unfortunately for Wall Street bulls, one of the first economists to warn that COVID-19 could trigger a stock market crash is eyeing this two-day recovery with extreme caution.
Allianz Chief Economic Adviser Mohamed A. El-Erian is concerned that the bounce in the Dow is not representative of a significant trend change in the index. He wrote today:
For markets, the encouraging bounce in risk assets on Tuesday, which included the best day for the Dow Jones Industrial Average since 1933, may be best viewed as an up-in-quality positioning opportunity rather than an all-clear market signal.
Soaring unemployment and stagnant economic activity have prompted the government to piece together a historic bailout package for corporations and citizens alike.
Businesses received a $2.3 trillion tax cut from the Trump administration in 2018, blowing a massive hole in an already unwieldy debt pile. U.S. growth did not come close to paying for this.
Many of these companies spent a large portion of this free-cash on stock buybacks – boosting the value of shares – and raising dividends for investors and executives. Suddenly facing an unprecedented demand shock, corporations are once again set to receive a massive bailout.
James Knightley, chief international economist at ING, anticipates that the deficit could more than double by the end of the year. He warns that even Trump’s plan to reopen the economy quickly won’t bring it back to full strength.
The US fiscal deficit was already on course to top $1 trillion this year. Even in a best-case situation where President Trump gets his wish and we start to see the economy tentatively re-opening at some point in 2Q 2020, we will still likely have some form of social distancing and restrictions. Either way, this means the economy still contracts sharply this year and implies a possible deficit in excess of $2.5 trillion.
A heavy debt burden can be problematic for a country. The deflationary situation in Japan serves as the hallmark of failed central bank and fiscal policy.
U.S. policymakers will be desperate to avoid a lost decade. But with talk of even more financial support on the way and growth forecasts flirting with depression levels, the national debt is only going to increase.
It was a tremendous day in the Dow 30, and another monster performance for Boeing ensured that there were big gains in the index.
Flying more than 30% on Wednesday alone, BA stock now trades at $167.
The catalyst for this move was news that companies with “national security interests” will receive bailout support from Congress, though Boeing was not named specifically.
Money for domestic airlines also helped propel the aerospace manufacturer’s stock higher.
Elsewhere, credit card companies rallied strongly as American Express (+11%) and Visa (+7%) cheered the arrival of government cash into the hands of consumers around the country as soon as the first week of April.
Nike jumped 12% on similar hopes of increased spending.