The Trump tweet-induced decline on Tuesday has more than reversed itself after yesterday’s action. We are all accustomed to the “Art of the Deal”, and Trump quickly changed his tune, stating he is in favor of numerous small deals specifically aimed at airlines, small businesses and the unemployed. Overnight there were more rumblings of coming back to the table to discuss a larger package, yet again. Whether his move was political or deal posturing, it’s clear leaving the table was seen as a big mistake. We are back to where the week started from a stimulus standpoint. It is Pelosi’s mega-package or nothing. Many Republicans in the Senate are against more spending, but it won’t take many to get it passed.
The Dow Jones has now bounced 600 points over two days as optimism roared back that something could get done before the election. The Dow Transportation Average is making new all-time highs as well. Leadership in companies that transport physical goods across the country is quite positive for future economic data. Futures are solidly positive this morning as well. The S&P is only ~4% off its all-time high.
Trump’s desire for a few skinny deals is also political as he tried to put Pelosi into a corner. The Republicans prefer to not bail out those blue States with historically bad finances, which would happen in a large package. He is in favor of helping out citizens and businesses that have been upended by the shutdowns. How can any politician be against sending money to those who are in trouble? One only has to look at history, from both sides of the aisle.
Large government spending agreements become bloated with pet projects, or simply put, politician paybacks to large donors. They don’t come into power without help. A large swath of small donors sends in donations to support their candidate of choice, but the real money comes from PAC’s and lobbyists. They are aligned with specific goals to support their focused platforms. It could be oil, marijuana, green energy or pharmaceuticals. You name it, someone is working behind the scenes.
A lot of political donations are made with an expectation of a favor in return. Campaign reform has been a topic of discussion for many years but nothing really gets done. Sad to say, but money still talks. That is why Democrats and Republicans may oppose a bunch of skinny deals. In a straight $25B airline relief bill, there is less room for any earmark provisions. Expanding existing Covid relief programs instead of a new $2T+ spending bill also limits what politicians can use for their pet projects. The Bridge to Nowhere would never make it in a skinny deal.
One would think a lot of skinny deals that are targeted at a specific subset who need funding can be done a lot cleaner and would be welcomed by voters. Yesterday, Pelosi came out against bailing out just the airlines, which puts the ball back into a compromising session between her and Mnuchin. A few Republicans also expressed hesitancy to help one industry over another. Hotels, restaurants, movie theatres and many other businesses need money too. It would take a lot of skinny deals to get what’s needed out the door. The Democrats will not give Trump a “win” before the election unless it has their platform desires included.
Eventually though, more money printing is coming. It is just a matter of timing. That is why the market responded so quickly after the sell-off on Tuesday. So long as the sides are talking, prospects for a pre-election bill get priced into stocks.
However, volatile action could come if this continues until after the election. Here are a few election scenarios and what could happen with a stimulus bill after the results are in:
• Status quo – The polls are all wrong. Trump wins and keeps a majority in the Senate. The House remains with the Democrats. Both sides have to meet in the middle. At last point there was a $1.6T Mnuchin bill and a $2.2T Pelosi one. There should be enough common ground to get money out. Common ground and common sense have proven to be difficult recently, but this gets done before year-end. Positive for all involved but a smaller package.
• Blue wave – This is becoming a better than 50/50 shot according to most experts. In this case the stimulus may have to wait until the newly elected take their posts. That means it takes longer and more small businesses fail. However, controlling all three branches means the original, much larger $3T+ spending bill is back on the table. More money printing means more pork spending, but it does lead to jobs & income gains. The stock market responds at some point in a positive fashion.
• Contested election – Although this is not probable at the moment, it is hardly off the table. There are too many stories of lost, trashed, or faulty ballots to have any confidence that the final numbers will be accurate. Still, if the vote count is overwhelmingly on one side, then a few thousand contested votes won’t matter and the courts may reject any fraud concerns. A truly contested election likely means no fiscal stimulus until 2021. That is unless the stock market tanks and forces everyone to work together like in April. Either way, it’s not great news for investors over the coming weeks and months.
As you can see, the end result is more money printing, more jobs and a higher stock market. Timing is the real wild card. Any delay to an agreement could bring more short-term volatility, but that is just another buying opportunity for long-term investors. The trend is your friend, and we’re right back into the middle of a long bull market channel from the 2008 lows. That sharp V-shaped drop and recovery proved to be a rare buying opportunity, albeit brief and scary at the time. We are right back where the year started (see below), with a bull market led by big-cap Technology, and innovative, old-school busting, new leaders that are ready for an online world.
Next week is the start of Q3 earnings reports. If preannouncements are any indication, numbers are too low. During Q2, visibility was muted and most companies offered vague guidance. The V-shaped snapback in most industries was unexpected. Estimates have been coming up, but the Street is still behind the recovery.
Earnings and interest rates drive markets. A lot of good news is priced in. We’ll see how stocks react to revenue and earnings beats that are forthcoming.
TV show “Monk” star Tony Shalhoub is 67 today. Ex-Prime Minister David Cameron is 54.
James Vogt, 610-260-2214