Fiscal stimulus has limitations. This time, it is at the mercy of COVID-19


Unless COVID-19 developments worldwide makes a u-turn towards a positive direction, we will continue to see global businesses being hampered and volatility to continue in the stock market.

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Wednesday, 11th March 2020, 12:20PM Adelaide (GMT+10:30) - Following news on US President Donald Trump's fiscal stimulus plan earlier this week, global stock market recovered a few percentage points yesterday from major sell-off on Monday. The recovery however looks temporary as COVID-19 continues to spread across the world, impacting more businesses worldwide on a larger scale. Any fiscal stimulus has it's limitations and this time, it is at the mercy of COVID-19.

The UNCTAD (United Nations Conference on Trade and Development), has recently announced that they foresee a possible $2 trillion shortfall in global income with a $220 billion hit to developing countries (excluding China). The most badly affected economies will be oil-exporting countries, but also other commodity exporters as well as those with strong trade linkages to the initially shocked economies.

 

Global GDP Growth after COVID UNCTADSource: UNCTAD calculations based on IMF, WEO, October, 2019

 

Unless COVID-19 takes an immediate U-turn towards a positive developments worldwide, any stock market recovery will prove short-lived. While stock markets globally have recovered from its Monday sell-off, it remains well below its all-time high in mid-February 2020. In fact, ASX All Ordinaries Index continues a down-ward trend on mid-day trading session today after recovering above 6000 points. The ASX All Ords fell as much as 2 per cent after President Trump failed to give more details of his planned stimulus package to combat the economic damage from the coronavirus.

 

ASX XAO Index 11 March 2020

Image source: Google Finance, 11th March 2020

 

For the time being, we will continue to see more volatility in the financial markets worldwide. A bullish stock market will experience ups and downs on it's way up before breaking all-time high. A bearish stock market will be no different, trending up and down before hitting all-time low. This is the "Dow Theory" introduced by Charles H. Dow, founder and first editor of The Wall Street Journal and co-founder of Dow Jones and Company.

Abrupt movements in the stock market are mostly from traders who looks to stop their losses or cash in for the day.