Government Stimulus Will Keep the Bull Market Alive in August

Following a moderate loss on Friday, stocks opened trading this morning for a solid gain. The Dow, S&P, and Nasdaq Composite all traded higher.

You’d think that would mean something bullish happened over the weekend. Instead, all investors saw was more bad news:

Millions of Chinese citizens are back under lockdown and President Joe Biden is considering reinstating lockdowns in the US, too.

In Massachusetts, 74% of people infected in a Covid0 delta variant outbreak were fully vaccinated according to the CDC, further poking holes into vaccine confidence.

But that’s not all.

7.5 million people are also about to fall off federal unemployment programs (set to expire September 6th) and Congress doesn’t seem interested in extending these unemployment provisions.

Yet equities marched higher still.

And don’t even bother looking at corporate earnings as a potential source of enthusiasm. Only a small number of major companies reported between Friday’s close and this morning’s open. Revenues didn’t really change sentiment as a result.

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What did have investors initially feeling bullish, though, was one of the market’s greatest allies since the Covid pandemic began:

Increased government spending.

In the US, senators introduced a bipartisan infrastructure bill worth $550 billion in spending over the next five years. This bill adds on to the previously approved $450 billion worth of funds, taking the total to a neat $1 trillion.

And in China, Beijing officials stated that the government would provide additional government stimulus to help support the decelerating Chinese economy. This resulted in a major rally for Chinese stocks as traders scrambled to buy with both hands. The CSI 300 Index, which tracks the top 300 stocks on the Shanghai Stock Exchange, rose 2.6%. It was the index’s best day in over 10 weeks.

Much of that optimism leaked into US stocks this morning, helped by the US infrastructure bill.

But shortly after noon, US stocks gave up almost all their morning gains. Treasury yields sunk (flattening the yield curve) while oil prices dropped as well. Economic uncertainty has been the saving grace for bears over the last week.

Around noon today, it seemed to wipe away the am trading session’s bullish hype with ease.

“The markets are having a hard time making up their mind as investors look for the next catalyst in either direction,” wrote Canaccord Genuity analyst Tony Dwyer in a note to clients.

“The fear over the Delta variant of the Covid-19 virus and the other side of ‘peak everything’ has investors on edge, while the monetary and fiscal support for the economy coupled with historically strong earnings keeps liquidity high.”

What’s driving equities hasn’t changed in the slightest. Government stimulus and liquidity nudge stocks higher. Covid delta variant infections and a flattened yield curve, on the other hand, push them lower.

Does this mean stocks will continue to rise? Most likely yes. Only a major spike in delta cases could derail the bull market. Or, a reduction in liquidity and stimulus.

But neither the government nor the Fed would reduce either any time soon. That’s giving bulls the “green light” to buy every dip they come across.

Even with equities trading at the top of what is likely the largest equity bubble in history.

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