A stimulus check might not be enough to boost demand and likely won't prevent the stock markets from plunging further.
U.S. stocks rallied Tuesday on expectations of a huge federal stimulus to deal with the economic crisis caused by coronavirus.
The Dow Jones finished up 5.2% or about 1,050 points to 21,237.38, one day after losing nearly 3,000 points. The Dow crashed again on Wednesday morning, losing 1,200 points shortly after markets opening.
To fight the coronavirus pandemic and the recession that is likely coming, the government is taking urgent measures.
The Trump administration announced Tuesday it will inject $1 trillion in the economy. The stimulus package would include sending $250 billion in checks to millions of Americans. Adults could receive a check of up to $1,000 in the next two weeks.
The U.S. government took a similar measure during the Great Recession. Under the Economic Stimulus Act of 2008, it sent a stimulus check of about $600 to every American.
The efforts are aimed at reviving the economy as more regions shut down to fight the spread of coronavirus.
According to Karl Haeling of LBBW, the stimulus announcements somewhat boosted sentiment, but there is still a lot of uncertainty:
We have no idea what is going to happen over the short term. In general, the lack of any real good idea about what earnings are going to be is just keeping people out of the market.
Nobody knows what’s going to happen in the short term. But a stimulus check might not provide an immediate boost to an economy crippled by the coronavirus crisis. Since large parts of the U.S. economy have been closed, they are cut off from a higher consumer spending power.
In addition, following the advice of public health experts, many Americans practice social distancing: they won’t go out to mingle in bars, restaurants and shopping centers. Plus, middle-class and high-income people could be inclined to save the money instead of spending it.
You’re not going to make people travel more. You’re not going to make them go to restaurants and things like that. Maybe on the margins, people will do more takeout and do more groceries.
The stimulus might not boost demand that much, as people stay homes and refrain from spending much of that $1,000 they get from Trump. We should instead see it as a kind of social insurance to help people survive during this crisis.
Sending a stimulus check to Americans will likely ease the coronavirus recession, but may not be much of an economic stimulus.
As the number of cases is increasing, people are panicking in every way: they stock up on toilet paper and cash, and sell their stocks.
We probably won’t see a recovery in the stock markets until the number of cases falls and fear fades. A stimulus check isn’t enough to calm down people. Fear and panic are very powerful and make people act irrationally.
People will only be reassured when the coronavirus slows down and everything goes back to normal. Until then, stock markets might plunge much further. Things are so bad that some officials even suggest shutting down the stock market.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.