Why Bulls Should Still Expect Stimulus and Another Rally

Bulls are feeling good again today. The market, in turn, is rising once more.

And it’s all because of stimulus – the number one trigger that could send equities soaring in an instant.

President Trump said this morning that he and Democrats were making progress on that front. Yesterday, Trump pushed for additional airline and paycheck protection program (PPP) relief, as well as $1,200 checks for qualifying Americans. Stocks surged shortly thereafter in response to his remarks.

For a moment on Tuesday, however, it seemed that all hope for further stimulus was lost. Trump ended negotiations on a bigger stimulus bill that had been caught in Congressional gridlock for weeks on end, choosing to push talks until after the presidential election.

“I shut down talks two days ago because they weren’t working out,” Trump said in an interview, before suggesting that a deal could soon be struck on the smaller relief offerings.

“Now they are starting to work out. We’re starting to have some very productive talks.”

POTUS continued, adding:

“I didn’t want to waste time. But in any event, we got back — both sides very capable — we got back, we started talking again. And we’re talking about airlines and we’re talking about a bigger deal than airlines. We’re talking about a deal with $1,200 per person, we’re talking about other things.”

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In other words, Trump’s speaking with Democrats about what he proposed yesterday. If the president can get a quick turnaround on these more targeted stimulus solutions, the market could see a major short-term boost as Wall Street raises its economic forecasts.

It’s also a sign that, eventually, additional relief is almost guaranteed, regardless of who wins in November.

“Even though there is uncertainty now about the fiscal stimulus negotiations, regardless of who wins the election, we are likely to have additional fiscal stimulus,” explained Quadratic Capital founder Nancy Davis.

“With the uncertainty, I think it’s important for investors to have a diversified portfolio, with investments that are uncorrelated to each other. We should expect more uncertainty going forward.”

The biggest source of risk for a “no stimulus” outcome is House Speaker Nancy Pelosi, who just announced that she wouldn’t support standalone aid for airlines without a larger stimulus bill.

The Dow gave up most of its gains right after Pelosi’s statement made the rounds.

But should investors be surprised with her stance on this? Absolutely not. As usual, the House is shutting down nearly everything the Trump administration wants to pass. It’s a time-honored tradition in U.S. politics, where the opposing party (which controls either the House or Senate) refuses to play ball with the current president and the other half of Congress.

In order to get Pelosi to agree to his terms, Trump will have to make Democrats an offer they can’t refuse. Or, at the very least, one that would make them look bad for not taking it.

A cash disbursement of $1,200 to qualifying Americans might just do the trick in that regard. So too would a bill to support small businesses via the PPP.

For bullish traders, that still skews things slightly in their favor even if that means no airline relief in October. And for the rest of the market, it could help defuse some of the fear and uncertainty simmering beneath the surface.

Because, as has been the case for weeks, stocks remain a post-Covid powder keg, just waiting to hit new all-time highs at a moment’s notice.

Stimulus – nearly any stimulus, at this point – would light the fuse, followed by what could be a rally of truly “explosive” proportions.

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