Will Congress “Kill” the Bull Market?

After opening higher this morning, stocks quickly retreated. The rally seems to finally be losing steam as bulls slow down.

All three major indexes are trading flat as of noon.

The trading session’s early gains looked like a continuation of the slow climb that started last week. Newfound enthusiasm pushed the market slightly higher day after day despite concerns about rising Covid-19 case totals.

Usually, an afternoon rally helped stocks forge ahead. It’s exactly what happened yesterday when the market was in a similar predicament. Equities opened higher, flattened around noon, and then closed for a gain.

With any luck, bulls could be treated to an encore performance today depending on how stimulus talks go in Washington. Senate Majority Leader Mitch McConnell commented that Republicans and Democrats were “still looking for a way forward” in a recent interview.

Lawmakers on both sides of the aisle claim they want to get a deal done soon, but can’t agree on what the relief bill should cover. Republicans want liability shielding for businesses that are likely to face frivolous coronavirus-related lawsuits. Democrats believe that local and state government support, on the other hand, is far more important.

McConnell said that dropping both issues and pursuing a bill without them could be a possible solution.

“What I recommend is we set aside liability and set aside state and local, and pass those things that we can agree on knowing full well we’ll be back at this after the 1st of the year,” he told reporters yesterday.

It’s a major shift in tone after McConnell said on Monday that “no bill will pass the Senate without liability protection for everyone related to the coronavirus.”

House Speaker Nancy Pelosi, on the other hand, is insisting on more of an “all or nothing” approach with the legislation.

“The bipartisan negotiations involving Senators and Members of the House have made good progress and must be allowed to proceed without Leader McConnell’s obstruction,” she said in a statement.

That doesn’t mean Republicans and Democrats are in complete disagreement, though. Paycheck Protection Program small business loans, funds for Covid-19 vaccine distribution, and aid for health-care providers are unanimously supported.

What’s developed is a scenario where the Senate wants to throw out both controversial measures – legal immunity and state/local government support – to strike a deal, while House Democrats demand compromise from Senate Republicans without making any concessions on their own end.

“The situation is really quite simple,” Senate Minority Leader Chuck Schumer said yesterday.

“There are glaring needs across the country, and we will need to work across party lines to pass legislation to meet those needs.”

To Schumer, “working across party lines” must mean asking the Republicans to drop legal immunity from the bill week after week without offering any other solutions. McConnell was admittedly asking Democrats to do the same for quite some time, but following his recent remarks, seems to have finally changed his tune.

Hopefully, for bulls, Schumer and Pelosi can come around as well.

Because if stimulus package negotiations stall again, and it becomes clear that the U.S. will exit 2020 without a deal, a major correction could follow. Investors already priced-in a mega stimulus deal over the last few months.

A “no-deal” scenario was unfathomable back in October when bullish enthusiasm began ramping-up. Yet here we are two months later, and the posturing in Congress continues without any tangible progress to show for it.

Of course, the Fed would likely step in if lawmakers can’t get the job done. Long-term, perma-low interest rates and a flood of liquidity should backstop the market.

However, the short-term damage could be severe if Democrats and Republicans can’t figure out a way to play nice. The House wraps up its current session on December 12th. The Senate, on the 13th.

Investors will closely be monitoring stimulus headlines until then. And if they don’t like what they hear – or, don’t hear, in this case – things could get messy in a hurry.

All while the general market teeters near its all-time highs.

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