The Fed: Unclear Future

On Wednesday, Fed chair Jerome H. Powell warned that we could be in for a multiyear recession if no more authorized aid is sent to help the victims of the coronavirus economic fallout. With that announcement, the stock market tumbled.

Powell's outlook certainly differs from the optimistic outlook that Trump has, predicting a rebound towards the end of the year, whereas Powell believes the situation is much grimmer than that.

Coming off of a huge rally of 30% in the S&P 500 back in March, investors started to become wary that the market is being overvalued. Even while unemployment was increasing, the stock market kept rallying, leading investors to believe that there was a disconnect between the markets and reality. Hedge fund manager, David Tepper, believed that "he thought the stock market was the most overvalued it has been since 1999".

In the US, more than 27 million are out of work, bringing the unemployment rate to 14.7% in April, one of the highest since the great depression.

With consumers losing jobs, they're spending rates will also be cut. This means businesses like restaurants and retailers will be forced to close, resulting in more job loss. Suppliers of these businesses will also be hurt, causing a chain effect to even more businesses.

There's also been talk of the Fed's introducing a negative interest rate, but that's not something the board is willing to do.

Both Republicans and Democrats of the senate do agree that more relief is needed, but the question rests now on the timing and execution.

What does this all mean? Well, you can certainly expect a new stimulus check coming to Americans, as the House Democrats have already proposed new stimulus checks worth up to $6000.

The stock market is also starting to see the reality of the situation, as the market had a red day on Wednesday, with nearly everything losing. Although it's unclear whether the market will continue a downward spiral, the hope of a "V" shaped recovery is starting to become more and more of a fantasy. Fed officials, including Powell, believes that the US economy will hit its low point this week, and then begin a slow recovery.

For investors, this doesn't mean that markets are exactly doomed, but it does mean that things are likely to take longer to recover, and more time to see stocks rebound to pre-covid share prices. Overall, stocks are continuing to go for discounted rates, and now would be the time to double up before the markets rally for good.

Any thoughts? Feel free to comment below

Follow Us

  • Facebook
  • Twitter
  • YouTube
  • Pinterest
  • Tumblr Social Icon
  • Instagram

©2020 by FinancialCanadianBlog