Insights & Advice

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Stimulus bill vaults stocks to new highs

A much-needed fiscal stimulus bill is expected to pass at the eleventh hour by lawmakers in Washington. Investors greeted that news by taking all three major averages skyward this week, with more gains in the offing.

As I wrote last week, politicians are waiting until the very last day before passing a $903 billion stimulus bill. Thursday was supposed to be the deadline, and then Friday; talks may well stretch through the weekend at this point.  In the meantime, another important piece of legislation, an extension of the government budget, had to be signed by Friday, December 18th to keep us from another government holiday shutdown. Readers may recall the 2018-2019 shutdown, the longest in history, when the president insisted on an appropriation of $5.7 billion to build the border wall. That  cost the American economy $11 billion, and President Trump didn’t get the money from Congress.

I am relieved that the two parties have come up with a compromise. The same deal, however, could have been struck weeks—if not months—ago, if not for the extreme partisanship that is fast destroying our nation.  From the investor’s point of view, the new $900 billion spending bill will help to bridge a dangerous economic gap now confronting us. The economy is tanking.

And while coronavirus vaccines are being distributed throughout the country and the world, it will take months before that task is completed. As Chairman Jerome Powell, of the Federal Reserve Bank, put it during this week’s FOMC meeting, “the issue is getting through the next 4-5 months.”

Even the politicians are now realizing they must do something. November 2020 retail sales, for example, showed a much weaker than expected number (a decrease of 1.1% versus expectations of a gain of 0.7%). Last month’s numbers were also revised downward.

The employment gains, too, have been declining for the last several weeks and may actually show a net job loss in the month of December. Thursday’s job claims revealed that another 885,000 Americans filed new unemployment claims last week. Nearly 5 million Americans can’t work because they are sick with coronavirus; that number has doubled in less than two months. Another 5.2 million said they weren’t working because of fears about getting sick or spreading the virus, according to the U.S. Census Bureau.

Our unemployment numbers are still way too high, warned Chairman Powell, and won’t be regaining their former luster anytime soon. His hope is that once the coronavirus vaccines are distributed and administered (sometime during the first and second quarter), the economy will begin to recover again.

I don’t expect to see the economy really pick up until sometime in the second half of next year. In the meantime, the new stimulus money will help support consumer spending just enough to get us by. My own belief (as echoed by the Federal Reserve Bank) is that more stimulus would have been the prudent course, but as they say, “beggars can’t be choosy.”

Although neither additional aid to states nor coronavirus liability protection for the nation’s businesses were part of the deal, quite a number of goodies are expected to be included in the package.

Commodity bulls will be happy to see the addition of $600 stimulus checks and an additional $300/week in beefed up unemployment benefits, since all that new money (if spent by consumers) could contribute to the stubbornly low inflation rate in the U.S. real estate, investors might also breathe a sigh of relief if the moratorium on foreclosures is extended beyond the end of 2020. That industry was bracing for a tidal wave of mortgage delinquencies at the turn of the year.

As for the market response to a stimulus bill, I suspect most of the good news has already been discounted by investors.  Recall that my upside target on the S&P 500 Index is 3,740-3,800.  We are getting close. I suspect we could see a pullback in equities at that point. But never fear, it could set us up for some nice gains next year.

 

 

 

 

 

 

 

 

 

 

 

 

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