Late on Wednesday night, the Senate finally managed to pass the much-anticipated $2 trillion rescue package. The market has been eagerly anticipating this news and now that it is concluded there is some "sell the news" reaction.
Legislation of this magnitude is always going to generate controversy and it is already quite loud in the case. The biggest concern for many is that it doesn't do enough to help individuals that will suddenly find themselves without income. While a one-time payment of $1200 and increased unemployment is helpful, it will be far from covering the overhead of money people. Further Congressional action is already being discussed, but that is not going to result in anything very quickly.
While this massive rescue/stimulus package is sure to help create some economic momentum at some point, the problem is that the market still has very limited visibility into the extent of the economic damage that is being done.
In the swift movement of this crisis, market players have struggled to understand how fast the coronavirus would spread and its level of severity. There still is great uncertainty about this and there will not be a better understanding until the number of cases has hit a peak.
Without clarity about coronavirus, we are unable to calculate its economic cost. On Thursday morning, we will have the first clue when weekly unemployment claims are released. Estimates vary widely and are going to be impacted to a great degree by timing. Some States will not be reporting the majority of claims until next week. Currently, expectations are for about 2 million unemployment claims, but this just a preliminary number.
While severe economic fallout is well anticipated, it is still theoretical in most cases. The reality of unemployment and the shut down of business is going to start to hit now. The rescue/stimulus legislation will help, but it is very likely to feel quite inadequate for most people.
Our job is to navigate how this news flow impacts the market. Over the last two days, we have seen a classic countertrend rally. Typically, such rallies will last longer, but this entire bear market is proceeding at an unprecedented rate. The indices went from all-time highs to a bear market in record time and this entire crisis is playing out in parabolic fashion. It is logical to assume that the countertrend bounces will be quick and fast, but also fail just as fast.
As I noted over the last couple of days, my game plan has been to sell into this countertrend bounce and do some repositioning. I have dumped a number of positions, raised my cash levels and was able to generate some gains during the bounce.
While it is extremely tempting to try to predict that the worst is over, there is little basis for that conclusion. The level of uncertainty that exists is tremendous. We will see evidence of that on Thursday as we hear about unemployment. The reaction to the numbers will be instructive, but most businesses still have no idea how long they will be unable to conduct normal business activities.
The most important thing to keep in mind right now is that this is a bear market and the primary goal should be capital preservation. There will be plenty of time to position for gains in the future, so don't put precious capital at risk when the future is still so uncertain.