Stocks are relentlessly shaking off political and fiscal policy uncertainty to climb back near their early September high-water mark. There is continued optimism for another round of fiscal stimulus. Because of the upcoming election, the time is either now or post-election. The amount will depend on the timing, so it is worth examining the different scenarios possible.
Typically, the stock market and uncertainty do not get along. And, currently, there is plenty of uncertainty to go around, including COVID-19, the health of the President, the economy, the upcoming election, etc. Even with all of these variables, the stock market just had its best week in three months with major indexes up 3% – 4%. So, what is moving this market higher in the face of conventional headwinds? Signs are pointing to potential fiscal stimulus even though it is a messy proposition.
The first clue came this past Tuesday. The stock market started on a positive note and was trading up more than 0.5% before President Trump took to Twitter to reject the Democrats’ stimulus plan offer. “I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business.” The string of tweets that purported to stop negotiations perfectly coincided with a steep drop in the stock market from a 0.5%+ gain to a 1%+ loss.
However, on Tuesday night, President Trump changed course and proposed some standalone stimulus provisions. By the market close on Wednesday, the S&P 500 had erased all of Tuesday’s losses, and the stock market marched upward again on Thursday and Friday.
As I write this, the prospects in the near term for a fiscal stimulus package are alive, but low. The two sides do not appear too far apart on overall scale. The Trump administration reportedly offered a comprehensive package worth $1.8 trillion on Friday, whereas the Democrat-sponsored HEROES Act carries a $2.2 trillion price tag. However, the political incentives are lacking. With the election this close, neither party wants to give the other a “win”. Also, Senate Majority Leader McConnell has not been involved in the process (Treasury Secretary Mnuchin has led Republican negotiations) and is instead focused on the nomination of Amy Coney Barrett to the Supreme Court with a short calendar.
If Democrats and Republicans do not reach an agreement this weekend or over the next three weeks, it likely will not spell doom for the market. The market views stimulus as delayed, not gone.
In any event, there are four possible election outcomes. We can speculate on the prospects and size of fiscal stimulus based on these outcomes.
1. Status quo – a Trump victory with a Republican Senate and Democratic House: It’s reasonable to project passing a stimulus bill that is marginally smaller than the current negotiated stimulus on the table ($1.8 trillion), due to Democrats’ negotiating power diminishing after a Trump victory.
2. Blue wave – a Biden victory with Democratic Senate and House: A Democratic sweep would more than likely lead to the largest fiscal stimulus package. The first version of the HEROES Act passed by the House in May was $3.1 trillion.
3. A Biden victory with Republican Senate and Democratic House: This scenario probably leads to the smallest stimulus package due to political gridlock. Another round of the Payroll Protection Program loans for small businesses and aid to airlines would cost approximately $500 billion.
4. A Trump victory with Democratic Senate and House: President Trump is less likely than Republican Senators to limit aid based on fiscal responsibility. In this scenario, it is reasonable to expect the current version of the HEROES Act at $2 trillion passes.
If those expectations are accurate, then the election outcome of the Senate may be the key to the amount of stimulus passed rather than the Presidency. Bespoke used that same potential stimulus thought exercise and overlayed current election probabilities from Predictit to develop an implied amount of fiscal stimulus over time. As you can see in the chart below, it bottomed in late August before rising to new highs in the last few days.
Potential fiscal stimulus has been a big driver of recent stock market returns and as a key factor to sustained economic recovery. However, it is not the only factor that has supported capital markets.
The Federal Reserve has been unequivocal in their support through monetary stimulus. On Monday, Fed Chair Powell said in a speech that, “By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste.” By suggesting that there is no downside to going all in on stimulus, the Fed is implying that there is no intention to back off zero-interest rate policy or quantitative easing policy measures anytime soon.
On the health-front, even with cases on an uptrend over the last month, there has been positive news related to treatment of COVID-19 absent a vaccine. President Trump, who is in a high-risk age and weight demographic, appears to have made it through his bout with the coronavirus relatively well, and can be an example of the efficacy of some of these treatments. Almost immediately, Trump received a dose of an experimental monoclonal antibody therapy from Regeneron. Then, he was treated with a course of the infused antiviral medication remdesivir and the steroid dexamethasone during his hospital stay.
On Friday morning, Gilead disclosed results from a large-scale trial of remdesivir. The antiviral drug helped COVID-19 patients who are hospitalized recover five days faster on average, and for severely ill patients, recovery was expedited by seven days. The study also found that remdesivir contributed to a significant reduction in death rates for patients who were in the early stages of receiving oxygen support. The study did not find a statistically significant mortality reduction, but if patients are treated early, we may be able to prevent people from ever progressing to high-risk stages.
More importantly, Gilead expects to have sufficient global supply of remdesivir by the end of October. The significance of stories like that will go a long way in easing the public’s fears over the virus and supporting recovery.
Have a great Sunday!
Timothy W. Ellis, Jr., CPA/PFS, CFP®
Senior Investment Strategist, Wealth Strategist