Policy ‘backstop’: A recap of recent stimulus measures, and how stocks have reacted
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Among the many changes caused by COVID-19, the pandemic has been an interesting barometer in terms of the scale and effectiveness of support measures by government and central banks.
And recent price action this week illustrates how sensitive markets still are to changes in the stimulus outlook.
Last week provided a good example, when the head honcho of the US central bank, Jerome Powell, said he expected interest rates would stay anchored (at zero) through until 2022.
In one sense, that could be considered relatively dovish guidance, but it wasn’t enough for markets. Powell also noted the US economy faced significant challenges ahead, and sentiment rapidly reversed, culminating in a 5.89 per cent crash for the S&P500 last Thursday.
Then on Monday, the Fed announced it would expand its bond-buying program to include corporate bonds to help maintain market liquidity.
The response from stocks was equally impressive, as the S&P500 reversed course from a 2 per cent drop to finish with a 0.83 per cent gain.
Nigel Green, chief executive at investment firm deVere Group, wrote this week that the extra stimulus is acting as a “backstop” or “floor” for equities.
And highlighting the change in market expectations, Green said the additional support measures were “widely expected”.
“Therefore, investors who have been paying attention have been topping-up their investment portfolios recently, as entry points will inevitably continue to go higher as we move forward,” Green said.
ASX stocks rose strongly yesterday on the back of the US lead, but what also provided a catalyst for returns were talks of further government stimulus, along with central bank help.
Specifically, reports indicated that President Trump was considering the launch of an additional $US1 trillion (~$1.4 trillion) infrastructure stimulus plan.
It follows the passage of a $US2 trillion virus-protection bill — the largest piece of approved spending in US history.
And it raises the question — have governments provided a near-term floor under markets? On the local front, the Morrison government has flagged plans to begin winding back its stimulus measures — led by the ~$70bn JobKeeper program — as the economy opens back up.
But if there’s further unexpected virus-related problems down the road, investors may need to factor in that the government will again be there to provide support.
“If you look at Australia before JobKeeper, it looked like retailers in Australia would go broke, not to mention pubs and gyms,” Prendergast said.
“No one predicted the stimulus that came through and flattened those disastrous economic implications. So you have to make an assessment from here — if things get worse that’s bad but equally, will there be another cheque written to take the edge off that negative impact?”
In his research note this week, deVere’s Green remains bullish on the short-term outlook — largely due to the effect of policy stimulus.
“This will support and likely boost asset prices moving forward,” Green said. “Investors will now be eyeing the opportunities before any fresh or enhanced stimulus packages are announced.”