US Senate reaches agreement to a $2 trillion fiscal stimulus package

A great US fiscal boost rallies markets but cannot solve all the virus-created problems.

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  1. Charles Stanley

As expected, the US Senate reached agreement between the parties to a $2 trillion fiscal stimulus package yesterday, which gave the markets a big boost. Democrats allowed substantial funds to be available for business through a $500bn fund for industries, cities and states, with a $367bn loan programme for small business. They also accepted the President's idea of sending $1200 to most Americans and $500 to most children. In return the Republicans accepted a substantial increase in unemployment insurance, granting $600 a week more for four months to those laid off and an additional £150bn for state and local purposes. The money for industry includes $50bn for passenger airlines and $8bn for freight airlines.

This vast sum is 10% of GDP, but it is not out of line with the magnitude of the hit the US economy is now experiencing given the widespread closures, soon to be followed by layoffs of employees. The markets were relieved that it looks likely to pass. The Senate is in session and is planning a vote today which should confirm the bipartisan support. The House of Representatives is not in session and hopes to pass it urgently by unanimity. If there are individual Representatives who object, the House will need to be recalled for a day's debate, with arrangements to allow some social distancing and a reduced Chamber presence. It seems very likely this will now pass.

Because the legislation had been cobbled together as a political compromise at speed, there will be difficulties with some of the detail. They are intending to set up an Independent Inspector General and Oversight Board to provide some accounting discipline, and there needs to be the translation of legal text into workable programmes so companies and people can apply and receive their cash. There are likely to be delays and teething problems, which will mean more people end up unemployed as cash strapped companies set about cutting liabilities.

This package deserved a positive welcome by markets as we thought it would receive, helped by short-covering.  It does not resolve the underlying problem. That remains the growing spread of the virus and the continued policy advice that the only way of responding is ever stronger and longer lockdown of much of the economy. Mr Trump tried to spin it more positively by suggesting the US can get back to work from April 12th, but the epidemiological and policy advisers do not think that is realistic. Elsewhere people are talking of many weeks before the all-clear can be sounded and there can be a progressive lifting of the restrictions. If the controls were lifted from mid-April then economies could make a rapid recovery, but if most or all of the controls last on into early summer more capacity and income will be lost and more businesses will be badly impaired.

Yesterday news spread of the work of the Oxford University Evolutionary ecology of Infectious Disease team suggesting that the virus may have been in the UK since early January, and maybe half the population has already had a mild form of it and may now have resistance to getting it again. The UK government has worked quickly on getting a test for antibodies in the blood of people who may have had the disease and hopes to be rolling out those tests soon. Only when we know the state of the population at large rather than just a selection of those with symptoms who have been tested for the disease will we have more accurate figures to adapt policy. The Imperial College UK work which currently drives the policy response assumes later arrival and faster build-up of bad cases and assumes most of the population has no immunity to it. For the time being, policy worldwide is being guided by Imperial College style work. The World Health Organisation believes this is a dangerous and fast-growing threat to most countries, requiring a long shut down to purge or delay it. We need to watch this professional dispute as it could have important bearings on how long restrictions remain in place on most people. The world is watching Italy in the hope that they are now witnessing a sustainable reduction in the growth rate of cases, to be followed by a downturn in cases as a result of their very tough measures. If it works there it will reinforce tougher and longer restrictions elsewhere but will start to set an end date to the closures which will be welcome.

The Central Banks and governments have now done most of what they needed to do to limit the economic damage the anti-virus policies create. They have battled the markets back to some two-way business and have created a lot of extra liquidity. Assuming we are still in for a couple of months of bad news with lockdowns and evidence emerging of the economic damage, the rally is a good opportunity to remove from portfolios those shares and sectors most damaged by the current shutdowns. Many companies prevented from trading will have to stop paying dividends, slash capital spending and also may lay off people. Less risk after this rally is sensible. A general buy signal awaits a change of mood to think that the period of damage is not too long, with the hope of restoration of normal conditions later this year with many companies surviving to enjoy the recovery. The crisis will increase market share for all digital-based solutions, so where a portfolio needs risk assets it is more reason to accentuate digital revolution companies. Some of these, along with food manufacture, food retail and medical companies, are experiencing demand surges during the close down. Many digital companies will expand market share faster during this period when traditional rivals are prevented from trading, and they will keep some of this extra market share when things return to normal. Cash remains crucial to businesses at a time when much turnover has been cancelled.

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