A Stock Market Rally On New Stimulus Bill Could Be ‘Short Lived’
Stocks moved higher yesterday. This came on the hopes that Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi could reach an agreement on a new stimulus bill. The two sides spoke for more than an hour. They did not come to terms. However, the two will resume talks tomorrow as they attempt to get a deal done ahead of the November election.
Even President Trump, recovering from the coronavirus at Walter Reed Hospital, weighed in. He added pressure on Congress to get a bill passed.
Last week Democrats passed their own $2.2 trillion coronavirus relief bill. It would reinstate the additional $600 per week in extra jobless benefits through January. It would also send out another round of $1,200 stimulus checks to most Americans and provide $436 billion in aid to states and municipalities. Additionally, the bill would extend Paycheck Protection Program loans for small businesses.
Treasury Secretary Mnuchin has put forward a $1.6 trillion plan that the White House is comfortable with. The key differences compared to the Democrats plan are reducing the extra jobless benefits to $400 weekly, $250 billion in state and local government relief, and liability protections for businesses. Democrats have consistently opposed a legal shield for companies.
Republican Sen. John Barrasso, third-ranking Senate Republican, spoke with CNBC yesterday. “There continue to be discussions, and I hope we can get a solution,” he said. He added that the demands from the Democrats “goes way beyond what we need to do to fight coronavirus.”
Will The Bill Provide Long-Term Relief?
If the two sides can reach an agreement, not everyone thinks the new stimulus bill will provide long-term relief for the markets.
Matt Maley, the lead strategist at Miller Tabak & Co, says any rally from a new stimulus bill could be “short lived.”
“We believe an agreement on a new fiscal plan is likely, but we’re not so sure it will help the stock market rally in a sustainable way. The market is still quite overvalued and the combination of the weakening employment picture plus a second wave of the virus does not bode well for any improvement for the ‘E’ part [earnings] of the P/E ratio going forward,” Maley said.
He added, “More importantly, history shows us that stimulus programs play a much bigger role as a catalyst for a strong/sustained rally when the stock market is flat on its back…not after a strong six-month rally.”
Surprisingly, Maley said there is a specific indicator — a tech sector. It can tell us how long a potential stimulus rally could last.
“The chip stocks have been a very important leadership group for the broad stock market, so it’s action over the coming days and weeks should be vitally important.”
He said if the SMH semiconductor ETF can close above its $183.55 September high, it would be “very, very bullish on several different levels.”
“If that happens, we’ll have to change our tune rather quickly.”