The Dow Jones Industrial Average took a hit at the end of February, dropping over 8,000 points by mid-March. The Dow Jones has largely stabilized since then, though events in recent days have seen further selling pressure.
Jerome Powell, the Chair of the Federal Reserve, warned on May 13 that a painful recession could be in store for the United States if policymakers didn’t take further action to support the economy.
Meanwhile, House Democrats have unveiled a new, US$3 trillion coronavirus relief package, but some congressional Republicans seem wary of additional relief, at least in its current form.
Uneven state and local policies pertaining to the reopening of the economy have, along with mixed news from scientists and health experts regarding vaccines and treatments, contributed to further market unease.
On Wednesday, Dr. Mike Ryan, the Executive Director of the WHO’s Health Emergencies Programme, said that the “virus may never go away.”
During testimony given to the US Senate on Tuesday, Dr. Anthony Fauci, a leading infectious diseases expert, warned that even if a vaccine was found, there is “no guarantee” that it would be 100% effective.
That said, many analysts acknowledge that markets are responding to uncertainty over the virus relatively well given the circumstances. Some even worry that the market has not adjusted to the current economic reality, instead existing in a state divorced from the situation on the ground.
The US government’s jobs report from April claims that 20.5 million jobs were lost, with the unemployment rate jumping to 14.7%, though recent data suggests job losses may be peaking.
What’s in store for the market? While the future is uncertain, some analysts suggest that investors can ride out increased market unpredictability. Others, however, are more skeptical, aware that significant danger lurks if the health crisis cannot be overcome fairly soon.
According to Kathleen Owens, founder of Aurora Financial Planning & Investment and a former advisor at Morgan Stanley Wealth Management, the market has the opportunity to emerge stronger in the relative near-term, especially since any trouble the market has faced has not resulted from underlying financial issues.
“The market drop had nothing to do with the market itself, financial companies or banks,” Owens told The Millennial Source. “It is an external event, so the prediction (by financial analysts) is that the drop was quick, but the subsequent rebound back to normal will be short.”
However, Owens warns that there could still be ups and downs.
“We certainly aren’t over the pain yet, when it comes to market volatility. However, I believe much of the immediate volatility has been due to opportunists [short sellers] taking advantage of the situation.”
“I would call the markets precarious at the moment for those that are inexperienced with volatility,” she concluded, adding that “the faster people can get back to work, the faster the markets will return to ‘normal.’”
Others warn of more trouble ahead, especially if potential health and job-related uncertainty lasts longer than expected. For Nancy Wallace, an expert in real estate markets at the University of California, Berkeley, a burgeoning mortgage crisis awaits if a significant percentage of the population becomes unable to pay their housing bills.
“The $2.2 trillion (coronavirus relief act) was the largest in history, but we’re talking about liabilities that are orders of magnitude bigger,” Wallace said last month. “Solutions are going to have to involve trillions of dollars. It could be the bailout of all bailouts.”
Over the longer term, the worry is that millions of unemployed people could default on their housing loans, potentially pushing some lenders into bankruptcy and leaving the backers of many of these loans, the US government, out to dry.
According to analysis conducted by Wallace and Berkeley professor Richard Stanton, the real danger lies in smaller “nonbank” lenders who were excluded from the regulations imposed on larger mortgage firms, like Fannie Mae and Freddie Mac, in the wake of the 2008 financial crisis.
“The bigger problem is they tend to have a high proportion of the riskier loans to low- and moderate-income people, which are backed by the U.S. government. We’re talking trillions of dollars,” Wallace said.
As of February 2020 these smaller nonbank lenders, like Quicken Loans and Freedom Mortgage, reportedly made up 88% of loan packages sold to Ginnie Mae, another government-owned mortgage association. In turn, these loans are merged into and backed by the US Department of Housing and Urban Development’s $2.1 trillion portfolio.
“Nonbanks were happy to promise that they would service 30-year loans and pay the bondholders, whether or not they received borrower principal and interest payments, but there are no mechanisms in place to hold them to that promise,” said Wallace. “They were gambling that the market wouldn’t crash.”
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