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Why the Stock Market Recovery Won’t Survive the Covid-19 Depression

Last Updated September 23, 2020 1:46 PM
Stephanie Bedard-Chateauneuf
Last Updated September 23, 2020 1:46 PM
  • U.S. stocks rallied on Tuesday on hopes that Congress will pass a stimulus package.
  • Economists forecast a recession that could be as severe as the Great Depression.
  • Stimulus measures won’t be enough to prevent deep damage to the economy.

The U.S. stock market soared Tuesday on hopes that Congress would soon sign a stimulus bill to protect the economy from the coronavirus pandemic.

Congress and the White House are negotiating a rescue plan that could inject nearly $2 trillion into the economy. The emergency measure would provide direct payments of $1,200 to most American adults and help small businesses closed across the country.

Democrats blocked a vote on Monday to push the package forward, criticizing a $500 billion fund the Republican proposal keeps for struggling businesses. But House Speaker Nancy Pelosi said this morning  she expects a deal “in the next few hours.”

Why The Stock Market Rally Won’t Last

The Dow Jones rose as much as 1,800 points in response to optimism about the deal. The stock market’s most closely-watched index had fallen to its lowest level in three years on Monday.

The market has experienced rebounds like this before, only to disappear immediately. Since stocks started selling off on February 20, the Dow has had seven days of gains, rising more than 4% on all but one occasion. After each increase, stocks fell the next day. So we should expect another plunge after the rally on Tuesday.

dow jones industrial average chart, stock market recovery
Since February 20, the Dow has had seven days of gains, none of them back-to-back. | Source: Yahoo Finance 

Investors need to see the number of new Covid-19 infections stabilize before the stock market finds a bottom.

According to Rob Sharpe, chief investment officer and group investment director at T. Rowe Price,  at least 10% of the U.S. economy is shut down.

Covid-19 Could Push The U.S. Into a Depression

That’s why analysts warn that the U.S. may face a prolonged depression rather than the type of short recession and rapid rebound that President Donald Trump expects.

donald trump, economy tweet
Source: Twitter 

Economists are rapidly increasing their forecasts of massive job losses and declines in GDP, which could fall by as much as 50% in the second quarter of the year. Such estimates have been unseen since the Great Depression that started in 1929 and continued for a brutal decade.

U.S. jobless claims are already reaching a record number. Goldman Sachs expects the number of jobless claims to hit 2.25 million  on Thursday, which would be the highest in American history.

u.s. jobless claims
U.S. jobless claims could hit a record 2.25 million this week. | Source: Vox 

The proposed rescue package represents only a few weeks of lost economic activity. But the blow will almost certainly be much bigger than that. The government’s efforts to mitigate damage to the economy probably won’t be enough.

LPL Financial Equity Strategist Jeff Buchbinder  said in a note:

A $1.5 trillion stimulus package sounds like a lot, and it is. But given the unemployment rate might be headed to double digits and many impacted businesses won’t survive through the spring without some help, it probably won’t be enough.

The coronavirus crisis has put an end to a 12-year bullish stock market. It could take several years to regain those losses. Some people might even have to delay their retirement.

And because people have less money, they will spend less. That will slow the recovery of the services sector, which accounts for more than two-thirds  of U.S. economic activity.

It’s clear that the U.S economy has entered a recession, but the question is how deep and how long the economic downturn will be.

Alarmingly, Stifel Chief Economist Lindsey M. Piegza  said that a repeat of 1929 has become a genuine possibility.

At this point, the most optimistic outcome for the domestic economy appears to be a temporary dip into negative akin to the contraction of 2001 with the worst case being a prolonged depression-like scenario similar to that experienced in 1929.

Let’s hope the worst scenario doesn’t come true. If it does happen, the stock market could plunge much further.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.