Coronavirus: The letter ‘U’ is helping drive stock markets down heavily | Business News

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The second longest-serving chairman of the US Federal Reserve, Alan Greenspan, was famed for having such an ability to move financial markets that even a cough from him could do so.

The latest incumbent in the post, Jay Powell, may not have quite the same influence as the man once dubbed “Uncle Al, the market’s pal”.

But he, too, has demonstrated his market-moving prowess during the last 24 hours.

During a webcast hosted by the Peterson Institute of International Economics, on Wednesday, Mr Powell offered a bleak assessment of the economic outlook and the speed at which the US economy may emerge from the COVID-19 crisis.

He said that there was a growing sense that the recovery may come “more slowly than we would like” and said that might make it necessary for the world’s most important central bank to do more.

The Fed chairman added: “The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II.”

He went on to say that, while the Fed would do what it could, extra spending by Washington might need to be forthcoming.

“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” he added.

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Mr Powell’s remarks have alarmed Wall Street because, for much of his time at the Fed, he has been seen as being hawkish on the US deficit.

This and his reluctance to cut interest rates as aggressively as, for example, the European Central Bank has earned him criticism on numerous occasions from Donald Trump.

The policy response to COVID-19 from the US authorities has already been immense, with the White House and US Congress committed to $3tn (£2.46tn) worth of stimulus packages, while the Fed itself has provided monetary stimulus in the form of lower interest rates and by buying $2tn (£1.64tn) worth of US Treasuries (US government IOUs) and mortgage securities.

So the fact that Mr Powell himself sees a need for more US government spending and borrowing sent US stock markets lower.

A man crosses the street at a nearly empty Time Square on April 09, 2020 in New York City.

US economy shrinks at fastest rate since 2008

The Dow Jones Industrial Average fell by 2.2%, the S&P 500 by 1.8% and the Nasdaq by 1.6% – with some traders speculating that Mr Powell’s bleak choice of phrases, such as “significant downside risk”, triggered sell orders by automated trading programmes whose algorithms look out for such words.

Thursday’s latest grim new jobless claims numbers, revealing that a further 2.981 million Americans have registered for unemployment benefits during the last week, added to the sense of gloom.

It has left the S&P 500 down by nearly 5% so far this week and leaving America’s broadest stock index in line for its biggest fall in eight weeks.

As ever, it has had a knock-on effect elsewhere around the world, with Asian markets all following overnight and European stock markets following suit once trading reopened, with the FTSE 100 falling almost 3% on the day to levels not seen for more than three weeks.

Yet there is also a sense that Mr Powell’s words are an injection of timely realism.

Before the beginning of this week, the S&P 500 had put on a stunning 31% since bottoming out on 23 March, while the Dow had put on 30%.

That was largely in response to optimism that the vast stimulus packages put in place would ensure a so-called “V-shaped” recovery, an immediate bounce-back in GDP, rather than a “U-shaped” recovery in which the US took longer to recover.

Chancellor Rishi Sunak

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But concerns were starting to mount that US investors in particular – European equities have not enjoyed anything like as strong a recovery from their March lows – were beginning to get overoptimistic and too euphoric.

Those fears were given voice, shortly after Mr Powell finished speaking, by David Tepper, founder of Appaloosa Management, one of Wall Street’s most influential hedge fund managers.

The billionaire told CNBC the US stock market was the most overvalued he had seen it since 1999 – just before the dot-com bubble burst.

He added: “The market’s pretty high and the Fed’s put a lot of money in here…the market is, by anybody’s standard, pretty full.

“There’s a lot of liquidity there and the Fed’s still there. It’s too hard to say the market can’t go up, or something like that, but it’s not a very good risk-reward market.”

Mr Tepper is far from the only high-profile investor issuing such warnings.

Stanley Druckenmiller, another billionaire fund manager, warned on Tuesday this week that he feared the economic recovery would take longer than expected.

Speaking at a webcast hosted by the Economic Club of New York, Mr Druckenmiller – who, earlier in his career, co-managed the Quantum Fund with legendary investor George Soros – said he feared “many years of sub-par growth”.

He added: “I pray I’m wrong on this, but I just think the V out [V-shaped recovery] is a fantasy. The risk-reward for equity is maybe as bad as I’ve seen it in my career.

“The wild card here is that the Fed can always step up their [asset] purchases.

“The consensus seems to be ‘don’t worry, the Fed has your back’. There’s only one problem with that – our analysis says it’s not true.”

Mr Druckenmiller also queries why US equity markets had rallied, during recent sessions, every time there appeared to be positive news about remdesivir, the anti-viral treatment for COVID-19 developed by drugmaker Gilead Sciences, which is currently in clinical trials.

He added: “I don’t see why anybody would change their behaviour because there’s a viral drug out there.”

There seems little doubt that US equity markets, during the fabulous rally they enjoyed in April, had become slightly detached from reality. The S&P 500 index traditionally trades on a price-earnings ratio (a key investment yardstick) of around 15 times but is currently trading at around 20 times.

Given the potentially dire consequences for company earnings, should the US economy take longer than expected to emerge from the recession it is currently in, it is obvious why some investors have been taking their money off the table this week.

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