If you thought stocks couldn’t go much higher, you haven’t looked at the averages this week. January has started off with a bang in more ways than one. Can it continue?
Some traders are crediting the action in financial markets this week to the Democrat’s twin win in Georgia’s Senatorial elections. Small cap stocks led the charge, as did industrial, materials, energy, financials, and other cyclical plays. The outliers that interest me also gained ground. Marijuana, clean energy stocks as well as bitcoin saw higher highs as investors bought equities that stand to benefit from policies favored by all three branches of a Democrat-controlled government. For those readers who have read my 2021 predications, this should come as no surprise.
These gains were even more surprising given the political backdrop. From an economic perspective, I suspect the markets have realized that, contrary to the political propaganda of the elections, Biden and his cabinet selections are far from the social-progressive disaster that many Republicans predicted. Instead, a team of largely moderate, but highly experienced, Democrats are gathering to confront and defeat the coronavirus.
Investors are also now counting on another stimulus bill. I believe a majority of Congress would probably go for a $2,000/per person payout, more aid to state and local governments, more money for vaccine distribution, and maybe an extension of additional unemployment benefits. Friday’s job losses (140,000), the first since April, should spur this relief package along. How much will depend on political horse trading, but I hope it will be enough to fill the gap between now and the time when we achieve herd immunity from the coronavirus.
I have written in the past that I believe that the Democrats, by achieving a razor-thin Senate majority while losing seats in the House, is not a recipe for massive tax hikes. Investors seem to be coming to that conclusion as well. The markets may expect that some increase in taxes could occur, but for now, they are more focused on the prospects for additional government spending.
Over time, some moderate increases in corporate taxes might be passed, as well as possibly restoring the top income tax rate for the million-dollar and above crowd, but I believe none of that would take effect this year. Biden does not have a functional majority, which leaves moderate Democrats and Republicans in control of the legislative agenda.
Markets also expect that Congress may finally get around to passing a much-needed infrastructure bill, but that piece of legislation could cost more than $4 trillion. The question will be how to pay for such a huge expense.
Four years ago, in January, if you may remember, I predicted an infrastructure bill in one of my columns. At that time, President Trump, promised a massive infrastructure bill during his campaign. He was also backed by much larger GOP majorities in both the House and the Senate and a bill still could not pass. Year after year, despite the dire necessity for this expenditure, nothing gets done. Maybe this time will be different.
As for the markets, we have already reached my high-end, short-term target for the S&P 500 Index at 3,800 on Thursday. My next guess could put that index higher by as much as 200 points. If so, I suspect stocks would be running out of air. Anything could happen, however, at this point, so be prepared.