Equity investors are always looking for a handout. It may seem unusual for a group of well-heeled free enterprisers to be eager for assistance from governments and their agencies, but anyone who follows financial news knows how much motivation arises from the mere mention of stimulus. Over the past decade investors have become dependent upon – if not addicted to – periodic injections of liquidity from the Federal Reserve. After the pandemic wreaked havoc on people, markets and the economy alike, investors thoroughly appreciated the federal government’s efforts to send money to consumers and businesses alike. Investors know a good thing when they see one, and monetary and fiscal stimuli both count as good things.
Thus it came as little surprise when markets rallied yesterday morning after Treasury Secretary Mnuchin announced that he would be willing to negotiate with Speaker of the House Pelosi about a new round of government stimulus. That is exactly the sort of largesse that makes investors salivate. The prospect of stimulus outweighed any concerns about the chaotic debate of the night before and the announcements of thousands of layoffs by several major corporations upon the expiry of worker protections contained in the last government rescue package.
The Pavlovian response was so strong that markets were willing to largely overlook any subsequent messaging to the contrary. Markets dipped somewhat when Senate Majority Leader McConnell noted that the sides were very far apart. Remember, even if the White House and the House of Representatives agree to a deal, the Senate still needs to approve it. But the dip was short-lived and largely forgotten this morning. Today, much of the early enthusiasm was dimmed when reports emerged that Speaker Pelosi was skeptical of a deal getting done. Later, they bounced again upon reports that she was hopeful that stimulus could get done.
Bear in mind that one can be both hopeful and skeptical at the same time. I’m hopeful that I win the lottery but I’m skeptical that it might actually occur. I would put the odds of Congress achieving a stimulus package at far better than those of my winning the lottery, but I believe that skepticism is warranted anyway.
My governmental skepticism is rooted in the continued acrimony that exists amidst our elected officials, and my market skepticism is rooted in the idea that we might be setting up for a “buy the rumor, sell the news” type of event. A fresh round of stimulus would undoubtedly provide a boost to the economy and markets. Considering that the recent rally appears to be predicated upon repeated hopes for fiscal help, one has to wonder how much is already priced in. And how much skepticism is warranted in case it doesn’t arrive.
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