Stocks fall after Powell pledges full Fed support
Yahoo Finance’s Brian Sozzi and Alexis Christoforous break down the market action with Alicia Levine, BNY Mellon Chief Strategist.
Video Transcript
ALEXIS CHRISTOFOROUS: Well, let's get to it now with Alicia Levine. She is chief strategist at BNY Mellon. We're also joined by Jared Blikre and, of course, my co-anchor, Brian Sozzi. Good morning to you all. Alicia, your response to what we just heard from Fed Chair Powell because the market was higher heading into-- at least futures were higher-- heading into his speech and then the Q&A session. And then they started to bounce around. And now, we are in negative. What did the market not like that Fed Chair Powell had to say this morning?
ALICIA LEVINE: So this is a marginal change. And what we heard today is that, you know, the hopes for the V-shaped recovery have now been really pushed out for something that takes a little bit longer. And what we heard today is that the Fed is more concerned that this is going to take longer for the US to recover.
And it's not that we won't get back to where we were. But the speed of how this happens is really the key variable between just finding bridge loans to provide liquidity or whether or not we have solvency issues for businesses as demand dries up over time. And that's what I heard today. It was really a finessing. It wasn't a big statement.
But it does suggest that now, you know, the greatest minds in economics and the Fed are really seeing this taking maybe longer than what had been hoped six weeks ago. And I think that's why the markets softened, in addition to the fact that we're just sort of ready to consolidate here after this enormous jump higher.
BRIAN SOZZI: Alicia, one thing that stood out to me is that Chair Powell said this downturn will have lasting damage on the economy. And when I hear that-- and I'd love to see if you agree with this-- I hear low returns for stocks and all sorts of investments.
ALICIA LEVINE: Yes, that's true. I mean, so let's trickle listen to the markets now. So your downturn lasts longer. If you listened to him to talk about the labor market, you know, the labor market probably won't recover you know that quickly. On average, during the recession, the labor market takes 30 months to recover-- OK, 30 months. So you know, that's over two years-- into the third year. If that's the case, then your forward returns will be lower on all asset classes because you can't just get the economy going all that quickly.
ALEXIS CHRISTOFOROUS: Alicia, what about some other things that Powell said this morning? He said that the Fed has lending powers, not spending powers. And he went on to say that further fiscal policy can be, quote, "costly but worth it." We know that lawmakers are now talking about a fourth stimulus package. House Democrats are behind it big time. But there were a lot of Republicans who were saying not yet and perhaps not at all. Do you think that the economy can recover and recover with some speed without a fourth stimulus package?
ALICIA LEVINE: So that's the second thing that investors heard today because it's clear that the next stimulus package is going to be a bit of a partisan fight. You know, I think the $3 trillion ticket is 50% higher than what anybody was expecting in their wildest dreams what the opening salvo would be, clearly setting up conflict with the Republicans in Congress.
And Powell is saying, look, we need this for our economy because this is not an eight-week hole that we need to fill. If you remember from our earlier discussions when we first passed fiscal so quickly, we talked about the fact that the amount passed really can only cover eight weeks. And that was really the $2 trillion that was at risk in those eight weeks with our GDP.
So if you're going longer into your recovery, you need more. And we'd like not to see a partisan fight about it. But $3 trillion is 15% of GDP on top of the $3 trillion that Congress has already spent. You're talking about 30% of GDP. That's an enormous burden for future generations to pay off.
BRIAN SOZZI: Alicia, do you care about negative interest rates? Chair Powell played that down-- doesn't sound like he's moving towards that or his follow our policy members here. But is that a key determinant in how far the market has rallied and what might happen next?
ALICIA LEVINE: Well, I think here, negative rates are really off the table. You know, we follow Europe as well-- the European sectors and European markets. And it's very clear that negative rates have outlived their usefulness. And you can't quite get out of that quicksand once you're in it. And so, it's encouraging to hear that it's unanimous that the Federal Reserve has no interest in negative rates because ultimately, what winds up happening is, you crush your financial sector. You crush your banks.
And the banks are central to the functioning and the intermediary part of our economy. So for me, I think it's very encouraging to hear. And the market was pricing in some move towards negative rates. But I think the Fed message has been very, very consistent and very clear since last October.
