The Democrats took Georgia and the “Blue Wave” is here. But stocks are surging instead of sinking.
And it’s all because of one headline, released earlier today by Bloomberg:
“Democratic Sen. Wyden Expects Early Vote on More Covid Relief”
The litany of longer-term issues feared by Wall Street – higher interest rates, higher taxes, and capital gains manipulation – have been put on the backburner as a result. More stimulus is on its way, and according to Sen. Ron Wyden, it could be here very soon.
The promise of additional aid was the one major positive bulls were hoping for if the Democrats won in Georgia.
What they didn’t see coming, however, was “vote talk” on said stimulus just one day after the polls closed.
But how big will the proposed relief package be? At the low end, Goldman Sachs predicts another $600 billion (2.7% of GDP) in stimulus. Meanwhile, Bank of America analysts believe Democrats will inject anywhere from $2-4 trillion in deficit spending, with the vast majority of it frontloaded over the next few months.
And though B of A’s estimate might seem outlandish at first, it also isn’t totally off base given the current political climate. The Democrats could lose the House in the 2022 midterm elections. They’ve got 2 years to get the job done.
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This morning, newly crowned Senate Majority Leader Chuck Schumer seemed more than up to the task.
“Buckle up!” he tweeted.
And though Schumer wasn’t referring to equities, investors should probably listen to his advice anyway. Today’s market-wide lift may have started another speculative blitz higher.
The question is whether stocks can keep those gains moving forward. More stimulus should only exacerbate the U.S. economy’s deep-seated problems while hastening the dollar’s decline.
“Helicopter Money,” a term coined by former Fed Chairman Ben Bernanke when describing the Fed’s ability to drop cash into the economy, is quickly becoming a reality. Another set of giant stimulus packages should push the U.S. into full-fledged “helicopter mode,” with consumers using their relief checks to buy things from online retailers.
Stocks are rising because the government’s now ready to subsidize the economy at an unprecedented scale. Everything’s up, including the 10-year treasury yield, which just hit 1.05% – a post-Covid high.
Investors are ignoring the surge in yields for the moment. But, eventually, long-duration assets will take a hit once the market sobers up.
Higher risk assets, like stocks, could follow. Equities can’t handle higher interest rates, and on the government’s current trajectory, rates should climb well above their pre-Covid percentages.
So, over the next week or two, traders need to enjoy the short-term burst caused by today’s stimulus speculation. Another dizzying rally isn’t at all out of the question now that Democrats run the show.
That doesn’t mean those gains will stick long-term, though. A wicked snap-back correction after stocks peak could skewer plenty of overzealous bulls.
Don’t be caught with your pants down when the market figures out just how much “stimulus fluff” there really is. Especially as we approach the release of Q4 earnings.