Political banter has dominated headlines and is influencing the market again, just like it has before, and the stock market doesn’t like it.
However, the rhetoric in Congress is centered around a very important topic to economists. The stimulus bills being proposed could dramatically influence econometric models, so everyone is paying attention.
Our assessment is that a stimulus bill between $500B – $700B could be agreed to this coming weekend, and become law next week.
However, we do not expect anything more than that.
In addition, if congressional leaders fail to reach an agreement this coming weekend we do not believe that stimulus will be coming at all.
Furthermore, the smaller sized stimulus bill that is possible will not include stimulus checks to individuals, and it will not work to bolster growth and investments in the stock market and real estate like the prior stimulus bill did.
Instead, this smaller stimulus bill will be designed to prevent problems, not bolster growth. There is a material difference between these intents.
Therefore, we believe that econometric models that are hoping for renewed economic growth as a result of stimulus are flawed.
More appropriately, models should expect fewer problems if stimulus passes, but that’s it.
The best case scenario is for fewer problems, the worst case scenario is a myriad of bankruptcies, but not a sudden pickup in economic growth.
Economic conditions are likely to be constrained in the immediate term, either way, and once the greed surrounding end of year bonuses subsides on Wall Street, we expect the Market to reflect that too.
Disclosure: This analysis has been previously disseminated to direct subscribers of Stock Traders Daily.
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