US anti-crisis stimulus package and S&P 500

May 26, 2020

S&P 500 growth: end of crisis or dead cat bounce?Mikhail Hypov

S&P 500 35% growth in the last two months! What is it? A new economic

growth period or the calm before the storm?

Dear readers,

Two months ago I published an analytical article regarding the $3 trillion anti-crisis measures taken by the U.S. government (here) and compared the situation to the Great Depression (here). Time flies even in self-isolation. Now it’s possible to sum up the initial results of the relief policy of putting loads of money into the economy.

![LiteForex: US anti-crisis stimulus package and S&P 500 - results! Crisis to end soon?][1]

In the chart, the blue line stands for the [S&P 500][2] while the orange one is for M2 money stock. M2 is, in short, all the cash plus deposits and assets in the form of securities. As you see, there is an immense dollar issuance that inflated the stock market, literally pushing [S&P 500][2] from its lows back into the trading channel. To my surprise, many economists recognized the fact as a working measure for recovering the economy, yet there is hardly any recovery and I will now explain why.

1. Record-high U.S. unemployment rate

![LiteForex: US anti-crisis stimulus package and S&P 500 - results! Crisis to end soon?][3]

The unemployment rate in the U.S. is coming close to 15% which is the worst level since the records began. The unemployment rate was higher than now only during the Great Depression. In 1932, every fourth of the working-age population was unemployed. However, the crisis is just beginning and it’s too early to conclude on this rate. Perhaps the record will be broken soon.

2. Decrease in consumer activity

![LiteForex: US anti-crisis stimulus package and S&P 500 - results! Crisis to end soon?][4]

Any market economy exists at the expense of consumption. In a market where there is no buyer, any business is doomed to bankruptcy. Unlike stock prices, consumer activity cannot be forced to grow by direct money infusion. Having lost work or in fear of losing it, a global pandemic and vague future overall, any sane person is unlikely to run to the bank for a loan to buy a new car or a trip to the sea. It is much more logical to put the money received from the state under the mattress and reduce household costs to a minimum. Such a model of consumer behaviour will remain in effect until the situation clears up and the feeling of confidence in the future returns to people. Obviously, the entire developed economy markets live in debt, in the United States and Europe, a rare large purchase is done without a loan. Consequently, the volume of consumer credit in the market is the most objective indicator of the state of the economy and consumer behaviour. The chart above shows the total volume of consumer loans. As you can see, after the 2008 crisis, it took two years for the volume of consumer loans to recover, which means that the volume of consumption also recovered. In the current situation, this indicator has only begun to decline. The current crisis is not unlike the 2008 crisis, and therefore there is no point in expecting a shorter recovery period than after the 2008 crisis either.

3. Second wave of the COVID-19 pandemic

![LiteForex: US anti-crisis stimulus package and S&P 500 - results! Crisis to end soon?][5]

Speaking of the global economic crisis, we must not forget about the root cause of the situation that we are observing. I see no reason to look at the COVID-19 cases chart as it varies in proportion to the number of tests performed. However, the chart of the number of deaths from COVID-19 shows that the dynamics are just beginning to slow down on a global scale. Most virologists predict the start of the second wave of the virus, which is likely to come at the beginning of winter. It is worth noting that the southern hemisphere of the planet is already entering the winter period. Given that there is no vaccine yet, most likely the number of deaths will not stop growing for a long time. Gregory A. Poland - an American physician and vaccinologist, an infectious diseases specialist, says that it is unlikely that the vaccine against COVID-19 will appear earlier than in 12-18 months. In one of his speeches, he said that patients with coronavirus will probably not have prolonged acquired immunity, which means that the risk of becoming ill for the second time remains high. If we draw historical analogies with the Spanish flu, the second wave of the disease was much worse and claimed more lives. The history may not repeat itself but there is practically no doubt about the future second wave.

4. The extent of the economic crisis

As I said earlier, this crisis is very different from the 2008 crisis in its scope. The U. S. is not on another planet and its economy is embedded in a global economic structure. The economic fire is not only in the USA - it is worldwide, and it is impossible to put it out with US dollars alone. The era of defaults is approaching fast - not only corporate but also nationwide. Judging by the situation in Argentina and Brazil, the countries of South America will be the first in this list, and not to mention the unfortunate Venezuela, which has been in such a state since 2016. The situation in Europe might also change dramatically. Analysts predict defaults of Greece and Italy and, having Brexit as a precedent, the potential collapse of the European Union. Obviously, the global economy is too interconnected. If in 2008 global corporations survived due to their presence in countries where the economic situation was more stable, now there is no place to wait out the storm. China, for example, has not even set goals for GDP in 2020.

5. Geopolitical confrontation

Probably, this factor is not an obvious reason for prolonging the economic crisis, however, one cannot turn a blind eye to the open economic confrontation between China and the United States. The likelihood that this conflict will develop into a full-fledged one is extremely small but the fact of this confrontation only adds fuel to the fire.

6. Technical analysis forecast

![LiteForex: US anti-crisis stimulus package and S&P 500 - results! Crisis to end soon?][6]

The global technical analysis forecast on the [S&P 500][2] does not give any hope. The index confidently broke the bullish trend and the minimum of the 2008 crisis. This movement was very revealing and is certainly not false if we talk about the technical analysis.

Probable scenario

![LiteForex: US anti-crisis stimulus package and S&P 500 - results! Crisis to end soon?][7]

It’s difficult to make long-term scenarios as the situation is completely unpredictable and can deteriorate sharply at any time, but now I see a curved and distorted figure of the head and shoulders pattern. The time scale on the chart is not representative, it is used rather for visual demonstration and designation of targets. From the point of view of technical analysis, 1850 points on the [S&P 500][2] index is a very adequate target in the medium term.

![LiteForex: US anti-crisis stimulus package and S&P 500 - results! Crisis to end soon?][8]

The right shoulder is now at the level of the left one and close to a psychological level of 3,000 points, and, in my opinion, one may consider shorts from current levels with a stop-loss at 3030 and the closest target at around 2600. You can open this position using the LiteForex tools [here][2]. Now is the best time to become a trader with LiteForex because the broker will soon draw cool gadgets, a car and even a house in [celebration of its 15th birthday][9]. Everyone can win! Register and participate!

All materials are provided for educational purposes only. They aren’t financial advice and don’t guarantee any profits. All trading decisions you make are your responsibility only.

Good luck and profits, everyone!

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Yours,

Michael @Hypov

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Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

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Price chart of SPX in real time mode

![S&P 500 growth: end of crisis or dead cat bounce?][12]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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