The COVID-19 pandemic induced an economic panic in March 2020. Share prices declined by 30%.
The Federal Reserve Bank responded to the panic by again expanding its balance sheet assets by a whopping 66%. It went from US$4.2 trillion on March 4, 2020, to in excess of US$7 trillion on May 20, 2020: Not surprisingly, the stock market soon recovered most of its March-April 2020 losses during May-June 2020.
Unemployment rose to 4.4% in March 2020. Bureau of Labor Statistics estimates showed the economy losing more than 20 million jobs in March and April. The economy shrank by an annualized 5 percent in the first quarter of 2020. By June 2020 unemployment had risen to in excess of 11%. Meanwhile, the stock market boomed. The S&P 500 stock market index, which comprises 505 common stocks issued by 500 large companies that are traded on American stock exchanges closed on 2 June 2020 at the highest level in nearly three months. This was despite a decline in S&P company earnings of over 40%.
The widening gap between stock valuations and economic fundamentals has never been so wide and has all the hallmarks of a traditional asset bubble. History tells us those bubbles usually burst eventually.
While the Federal Reserve has propped up stock market prices by injecting massive liquidity into the financial system and, for the first time in its history, actually buying up private corporate debt, the story is very different when it comes to federal government support for workers.
The CARES Act, the federal coronavirus relief law enacted in March 2020, gave an extra $600 per week to those receiving unemployment benefits. Unemployment benefits in the USA are paid at the state level and commonly only last for 6 months (although extensions commonly occur in downturns).
But, in all states, the $600 federal subsidy will end this weekend — on July 25 or 26. Recipients will continue to receive standard state benefits, which average $383 a week. But removing the $600 federal subsidy will mean increased hardship for millions.
Around 32 million Americans were collecting unemployment benefits as of June 27, according to the most recent data from the U.S. Labor Department.