@theMarket: Same Old Stimulus Song

Investors should know better by now. Stimulus talks have been going on since July 2020, but politicians in the capital appear to be stuck on the same old issues. Unfortunately, the deadline for a 2020 compromise bill is less than three weeks away.

 

It is anyone's guess whether the nation's economic and pandemic plight will win over partisan politics. It hasn't so far. The financial markets are not taking kindly to failure at this point. The all-time highs we have been enjoying for the last two weeks have been built on investors' near certainty that at least $900 billion in new Federal stimulus money would be forthcoming shortly.

 

Those funds were supposed to help bridge the gap in both human suffering and economic growth between now and the time the coronavirus vaccines will be readily available throughout the nation. Normally, when such an important binary event is in the offing, we would expect an 11th-hour deal to be struck. Should this time be any different?

 

In addition, there is another piece of legislation that also needs to be passed. The one-week Federal budget extension is also in play and without it the nation would experience another government shutdown. Delay allows both parties to garner all the media coverage possible. It is the consummate blame game and political theatre at its best (or worst). But what if a stimulus deal doesn't happen? Or the government does shut down?

 

In all likelihood, the stock market will decline, but any sell-off would probably be limited. I give a government shutdown a low probability, but a new stimulus bill could be a toss-up. I suspect more aid is being held hostage at this point by Georgia's run-off senatorial elections on Jan. 5. Both parties are attempting to influence voters' preference before the elections. The stimulus bill appears to be the trump card and will happen if one side or the other feels its passage gives them a winning hand. What happens after the elections could also be important for the stock market.

 

If the Democrats win (and thus take command of both houses of Congress), most equity strategists are expecting a knee-jerk decline, as Wall Street starts to discount a potential increase in corporate taxes (as Biden has promised during his election campaign). 

 

That tax risk might be partially off-set by expectations that the Democrats will want to spend a whole lot more in stimulus than under a Republican-controlled Senate. If the GOP wins the Senate race in Georgia, Wall Street believes tax increases and a large stimulus package are probably both off the table. If that sounds too neat and tidy, it probably is. 

 

My own take is that neither party will have a functional majority in the Senate, and maybe even in the House, no matter who wins in Georgia. As a result, I am not expecting anything "big" to get done on either taxes or stimulus. In the meantime, any downside volatility created by all this political noise would give investors the opportunity to buy stocks at lower prices. Why buy? As I have explained many times in the past, the key to the economy and further gains in the stock market have always hinged on beating the coronavirus.

 

It is simple really; while all of this political drama plays out, the new COVID-19 vaccines should continue to be distributed. More businesses should re-open as a result, and the economy should right itself on its own over time. As it does, the stock market should begin to discount an even stronger rate of economic growth in 2021. If so, we will be off to the races. 

 

That gives you the broad-brush strokes of what I am expecting in the financial markets over the course of next year. There will most likely be potholes along the way. The vaccine distribution, for example, will probably not go as smoothly as most expect. We are already getting reports of some serious side effects from some patients after receiving the second dose of Pfizer's vaccine. 

 

If the two parties somehow re-learn the art of compromise (something that I believe has been the secret of America's strength and success since its founding), then we should expect even higher gains in next year's U.S. market. If not, I advise looking elsewhere for better performance.