by Greg Valliere, AGF Management Ltd.
Insights and Market Perspectives
Author: Greg Valliere
May 4, 2020
IT ALL LOOKED SO GOOD as the stock market rallied in April: an astonishingly unified Congress, pumping money out to a public that seemed willing to accept a draconian shutdown. That’s gone now, as Congress begins a bickering May — and hotheads from the California beaches to state capitols reject social distancing.
GETTING A V-SHAPED RECOVERY always seemed to be a stretch, but now it’s looking nearly impossible. In a Fox town hall last night, President Trump promised a roaring 2021 recovery, but he was mum about the second half of this year.
YET IT STRIKES US that a mood of self-congratulation — combined with virus fatigue — has taken hold as warm weather seduces the country. One problem: while new cases and fatalities are dropping in New York, they are still surging in much of America.
NEVERTHELESS, THE MOOD HAS SHIFTED ON TWO FRONTS:
1. CONGRESS: The Senate returns this week, the House next week amid a cacophony of demands and ultimatums. Republicans are insisting on lawsuit protection for businesses, and they won’t consider state and local government aid — $1 trillion is needed, Nancy Pelosi says — that bails out pension funds.
AND TO FURTHER COMPLICATE the legislative outlook, Trump said last night that he won’t consier a new bill that doesn’t include a deep payroll tax cut — a nonstarter for Congress because that would raid the Social Security trust fund while providing tax cuts only to people who are employed.
THE APRIL RESOLVE TO DO WHATEVER IT TAKES still applies to the Federal Reserve, and Chairman Jerome Powell has virtually begged Congress to do more; he knows that gridlock looms. Far more needs to be done, yet the next bill may not come into focus until mid-summer. Perhaps an ugly jobs report this Friday — with unemployment above 15% — will motivate Congress.
2. THE PUBLIC: Polls show overwhelming support for going slow on easing the lockdown; the public is leery about going to malls and restaurants. But a minority, perhaps no more than 25% of the country, is abandoning social distancing, ignoring advice from the scientists. So more clusters of infections are certain throughout the summer.
If there’s a consensus, it seems to be this: the public can’t be forced to comply with restrictions, so the country will just have to live with more cases and fatalities, perhaps ebbing this summer but then coming back by the fall.
SO WEAR YOUR MASK, don’t shake hands, check your temperature, get tested, etc. — for the vast majority, that’s obvious. But a noisy minority will not comply. As fatalities exceed 100,000 by late summer, the only hope will be a vaccine by Christmas.
THE ECONOMY WILL REBOUND in 2021, but can state and local governments hang on that long? The Fed will have to lend massively. Will consumers come out of hiding? Many will not.
BOTTOM LINE: This is no time to go wobbly, as Margaret Thatcher famously told George H.W. Bush during the Gulf war. That’s good advice now, because we’re nowhere close to victory over the virus.
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This post was first published at the AGF Perspectives Blog.
