[Good Morning Stock Market] US Policy Capacity Exists and Concerns Over COVID-19 Control Ease

Major US Stock Markets Rise Over 7%
Government and Fed Stimulus Measures Boost Optimism on COVID-19 Control

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] While the U.S. government is rolling out various stimulus measures, expectations that the spread of the novel coronavirus infection (COVID-19) will subside are forming, leading to an improvement in investor sentiment. Although stability is being regained faster than during the 2008 financial crisis, as earnings announcements are approaching, there are concerns that attention should be paid to the differences between existing forecasts and actual results.

◆ Ilhyuk Kim, KB Securities Researcher= Major U.S. stock indices rose more than 7% compared to the previous day. The U.S. S&P 500 increased by 7.03%, the Dow Jones Industrial Average by 7.73%, and the Nasdaq by 7.33%. This appears to be due to growing expectations that COVID-19 can be controlled and additional policies to fill the economic void.

Although the number of COVID-19 confirmed cases is increasing, the growth rate of confirmed cases is slowing down in major European countries such as Italy, Spain, and Germany. Like China and South Korea, Europe is expected to be able to control COVID-19, and the U.S. is also expected to see the spread subside similarly to Asia and Europe.

There is also a strong policy will to fill the economic gap caused by COVID-19. The U.S. Federal Reserve (Fed) has announced it will introduce a program to support self-employed loans within this week. The Small Business Administration started operating the Paycheck Protection Program (PPP) on the 3rd to provide loans for payroll to help maintain employment. The $2.1 trillion (approximately 2,570 trillion KRW) third stimulus package passed at the end of last month included a $349 billion budget for PPP. If borrowers maintain all employment for 8 weeks after receiving the loan and spend the loan only on payroll, rent, mortgage, and utilities, the loan will be forgiven. This is to protect self-employed businesses from permanent damage due to COVID-19 over the next two months. The Fed plans to purchase PPP loans from banks to help banks provide additional loans.

Additional fine-tuning policies from the Fed are also emerging. To increase loans to households and small businesses with repayment ability, the Fed announced it will temporarily lower leverage ratios for regional banks. This is because, despite increased loan demand recently, regional banks have not been able to sufficiently increase loans due to leverage regulations. The New York Federal Reserve Bank announced it will operate a program supporting the commercial paper (CP) market starting from the 14th.

Government-level efforts have also appeared. Larry Kudlow, Chairman of the U.S. White House National Economic Council (NEC), expressed support for issuing "war bonds." This is an argument that unusual methods must be employed to respond to COVID-19. Steven Mnuchin, U.S. Treasury Secretary, stated that funds should be raised through the current government bond issuance system but advocated for issuing ultra-long-term government bonds to secure funds needed for COVID-19 response. Although the methods differ, all economic officials are seeking ways to inject sufficient fiscal resources.

◆ Jaeman Lee, Hana Financial Investment Researcher= The price-to-earnings ratio (PER) of the S&P 500 index has fallen 27% from the early-year peak to 14.1 times (as of the 20th of last month). The current PER is 16.3 times. Assuming the index maintains its current level (2,489 points as of the 3rd), if earnings per share (EPS) estimates are further revised downward by 15%, the PER could rise to around 19 times, the previous upper range. Although it is positive that investor sentiment is stabilizing faster than during the 2008 global financial crisis, from now on, actual downward revisions of earnings estimates due to earnings announcements may be reflected, so the valuation hurdle must be overcome.

From a mid- to long-term perspective, there is a proportional relationship between Fed assets and the S&P 500 PER, so the PER is expected to normalize. Based on the regression equation between Fed assets and the S&P 500 PER, the estimated PER considering the current Fed asset size ($5.5 trillion) is 19 times. However, it is necessary to keep in mind that the normalization process of PER may vary by sector.

This content was produced with the assistance of AI translation services.