Tags: Coronavirus | stocks | ignore | stimulus rift | worries | wall street

Stocks Ignore Stimulus Rift, Sowing Worries on Wall Street

Stocks Ignore Stimulus Rift, Sowing Worries on Wall Street
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Saturday, 15 August 2020 05:57 PM

This week’s run-up in U.S. stocks toward their highest levels on record seems an anomaly, considering the political breakdown over a $1 trillion-plus fiscal stimulus package, and it’s spurring concerns from Wall Street to Capitol Hill.

Federal Reserve officials and private economists alike have emphasized that a sharp drop-off in government spending imperils a recovery from the historic collapse in gross domestic product last quarter. But the impasse between Republican and Democratic negotiators over renewed coronavirus relief proved no bar to the S&P 500 Index notching a third straight week of gains.

Explanations for the disconnect abound, from an easy Fed and reliance on a small handful of big-cap shares driving gains to unilateral income-support moves by President Donald Trump. And the advance has provoked two key different sources of unease.

Some fund managers warn the rally makes the market more vulnerable to a sharp selloff if traders suddenly priced in “no deal.” While in Washington, there’s angst that the equity gains have removed what might have been a pressure point for the two sides to negotiate.

A hint of what could happen if investors turn their attention more decisively toward Washington came on Tuesday, when Senate Majority Leader Mitch McConnell said the talks were at “a bit of a stalemate.” The S&P 500 slumped as much as 1% that day. It recovered to climb 0.6% for the week.

“If there is one part of the narrative that leaves me feeling naked and afraid, it is the story out of D.C.,” said Peter Tchir, head of macro strategy at Academy Securities. “I expect that inaction out of D.C. and the process around executive orders will weigh on the market.”

Trump on Aug. 8 signed orders that extend supplementary unemployment insurance payments and offered employers a deferral on collection of payroll taxes, though it’s uncertain how effectively they can be implemented. Estimates of their impact are a fraction of the $1 trillion stimulus package proposed by Republicans, and even less of the $3.4 trillion put forward by Democrats.

On Capitol Hill, staffers from both sides of the political aisle privately share the same concerns as some veteran fund managers. One senior Democratic aide expressed shock about the lack of market reaction to the failure to renew enhanced jobless benefits through congressional legislation.

Not only did the $600 a week that expired in July help prevent a deeper collapse in household spending, but banks found themselves “surprised at the very low rate of delinquencies despite high unemployment,” a Deutsche Bank AG analysis of second-quarter earnings statements showed.

Under Trump’s directive, the federal government provides for a potential $300 extra a week and encourages a further, voluntary match of $100 from states. With a finite bucket of funds to draw from and states having to process the claims, the ultimate payout is unclear.

The Democratic aide noted that, given the previous benefits have already expired, there’s no action-forcing event looming for markets to react to. A Republican counterpart didn’t see a potential for a climax of tension until around Sept. 30, when the White House and Congress will need to forge some sort of deal to keep federal spending going.

Even if the two sides did restart talks -- perhaps from internal pressure as the November election looms -- it could be weeks before a compromise could be put into legislative language and enacted, leaving the economy without that aid in the interim.

Trump, Pelosi

For now, Trump is touting the near-record levels in equities as a signal of a “V-shaped recovery.” The Democratic side’s rejoinder is that a complement 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 said on MSNBC Thursday. “Why can’t we spend some more trillions of dollars to shore up America’s working families?”

Economic data haven’t been overwhelmingly supportive of either side lately, with most indicators showing continued -- though less robust -- improvement from last quarter’s historic collapse. A change on that score could be the decider.

“In the absence of another aid package, we are likely to see a slower recovery,” said Don Beyer, vice chair of the congressional Joint Economic Committee and a Virginia Democrat. “In the face of these prospects, Wall Street’s optimism, like Republicans’ intransigence, is bewildering.”

Some fund managers voice the same economic concerns.

“There’s going to be additional pain on Main Street, there’s going to be more bankruptcies, there’s going to be more closing of companies, there’s going to be continued higher unemployment,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “That’s why I also think that we’ll probably get an additional stimulus package coming.”

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This week's run-up in U.S. stocks toward their highest levels on record seems an anomaly, considering the political breakdown over a $1 trillion-plus fiscal stimulus package, and it's spurring concerns from Wall Street to Capitol Hill.
stocks, ignore, stimulus rift, worries, wall street
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2020-57-15
Saturday, 15 August 2020 05:57 PM
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