Photographer: Bloomberg Daybreak / Bloomberg
Photographer: Bloomberg Daybreak / Bloomberg
This week’s rise in U.S. equities to its highest levels on record seems like an anomaly, given the political breakthrough over a $ 1 trillion-plus fiscal incentive package, and it raises concerns from Wall Street to Capitol Hill.
Federal Reserve officials and private economists have stressed a sharp drop-off in government spending requires a recovery from the historic collapse in gross domestic product over the past four years. But the impasse between Republican and Democratic negotiators over renewed coronavirus relief proved no bar for the S&P 500 index, which reached a third straight week of gains.
Explanation of the discontent abounds, from an easy Fed and reliance on a small handful of stocks with large caps leading profits to unilateral movements in support of revenue by President Donald Trump. And the progress has provoked two major different sources of unrest.
Some fund managers warn that the rally will make the market more vulnerable to a sharp selloff as traders suddenly price in “no deal.” While in Washington, there are fears that stock gains have removed what could have been a pressure point for both sides to negotiate.
A hint of what could happen if investors turn their attention more decisively to Washington came on Tuesday, when Senate Majority Leader Mitch McConnell said the talks were on “a bit of a stalemate.” The S&P 500 dropped as much as 1% that day. It came back to climb 0.6% for the week.
“If there’s one part of the story that makes me naked and scared, it’s the story from DC,” said Peter Tchir, head of macro strategy at Academy Securities. “I expect that action from DC and the process of executing orders in the market will weigh.”
On August 8, Trump signed orders extending additional unemployment insurance payments and offering employers a proposal on tax collection, although it is not sure how effectively they can be implemented. Estimates of their impact are a fraction of the $ 1 trillion incentive package proposed by Republicans, and even less than the $ 3.4 trillion proposed by Democrats.
At Capitol Hill, employees from both sides of the political aisle share the same concerns as some veteran fund managers. One senior Democratic aide expressed shock at the lack of response in the market for failing to improve unemployment benefits through congressional legislation.
Not only did the $ 600 per week spent in July help prevent a deeper slump in household spending, but banks found themselves “surprised by the very low rate of unemployment despite high unemployment,” a Deutsche Bank AG income analysis in the second quarter.
Under Trump’s directive, the federal government provides a potential $ 300 extra a week and encourages a further, voluntary $ 100 voluntary contest from states. With a finite bucket of funds to withdraw and states having to process the claims, the final payout is unclear.
The democratic aide noted that, given the previous benefits have already expired, there is no action-forced event that responds to markets. A Republican opponent saw no potential for a climax of tension until around Sept. 30, when the White House and Congress must commit some sort of deal to sustain federal spending.
Even if the two sides start talks again – perhaps from internal pressure as the November elections came under – it could take weeks before a compromise in legislative language could be put in place and implemented, leaving the economy without that help in the meantime.
Trump, Pelosi
For now, Trump is touting the near-record levels in stocks as a signal of a “V-shaped recovery.” The rejoinder of the Democratic side is that a supplement to that expanded equity wealth, enjoyed by some, is needed from the federal government.
“Our best shot with them is to say ‘all you care about, in our view, is the stock market,'” House Speaker Nancy Pelosi told MSNBC on Thursday. “Why can we not spend trillions more dollars to bring America’s working families to the coast?”
Economic data have not overwhelmingly supported both sides lately, with most indicators continuing – albeit less robust – improvement from the last quarter’s historic collapse. A change on that score could be the decision.
Longing economic pain lags behind U.S. Retail Recovery
‘There will be extra pain on Main Street“There will be more bankruptcies, more companies will close, higher unemployment will continue,” said Jim Paulsen, chief investment strategist at Leuthold Group. “That’s why I also think we’ll probably get an extra incentive package.”
.
