Here is the good news. Italy’s infection rates fell for a second day on Monday and China is easing restrictions on hard-hit Wuhan province.
The Federal Reserve has thrown the kitchen sink at the coronavirus and Congress is working on a rescue package, with Senate Minority Leader Chuck Schumer saying he had “very good” discussions with Treasury Secretary Steven Mnuchin late Monday.
For now, all of the above is cheering up investors, who are climbing a wall of worry, with the S&P 500 US:SPX down 30% so far this year and job losses landing or looming for many.
Whether the on-again, off-again bounce lasts depends is for now hinging on a U.S. deal, alongside continued good news on the virus containment. That brings us to our call of the day from JonesTrading’s chief market strategist Michael O’Rourke, who warns that “while it remains dangerous out there, from a liquidity perspective, it is getting dangerous to be negative on equities at these levels.”
The three big catalysts driving the equity market in the near term are policy drivers — political, fiscal and monetary — he tells clients in a note.
On the political front, investors are getting mixed messages about whether saving human lives with a shutdown is worth the potential depression it might cause. But O’Rourke thinks that in a couple of weeks, everyone will have the grip of this “social distancing” thing. “At that point, the [virus] curve will at least be partially flattened, the nation will be two more weeks prepared, and a thoughtful path forward can be crafted,” he said.
As for the fiscal side, he believes U.S. stimulus deal will get done. “The Democrats’ plan of putting more cash in the hand of consumers in an economy that is 70% consumer driven is preferred. That can be easily rationalized as a well deserved tax refund to match 2017’s Corporate tax cut that went to buy back shares,” he said.
Then there is the Fed, which has now delivered unlimited quantitative easing and is buying everything but “high yield credit and equities. Nobody should be surprised if the next moment of panic leads to a special purpose vehicle to buy stocks and equity ETFs [exchange-traded funds],” O’Rourke said.
“While the long-term ramifications of these measures are dangerous, the short-term liquidity will be strong. If there was ever a time not to fight the Fed, this is it,” said O’Rourke.
This article originally appeared on MarketWatch.
