Oct. 9, 2020 - Stocks had their best week in some time this week in a broad-based rally that spread across the entire market.
The rally was driven almost entirely by hopes for further economic stimulus. There are actually two separate phases of stimulus in play here. The first, is the hope that an additional spending package can be approved before the election. The second is the longer-term prospect of increased federal spending under a Biden Administration, which seems to be becoming the consensus view of analysts and betting markets.
As is typical with markets, the short-term tends to outweigh the long term, and so when the President tweeted Tuesday that he had ordered an end to stimulus talks, the market fell hard. The major indices, which had been at their highs of day all fell by more than two percent to end the day with losses. Those tweets were followed by more tweets in the evening suggesting the White House was in favor of some stimulus, but maybe just smaller, targeted packages, such as aid for the struggling airline industry.
That idea was replaced Thursday with a push for a comprehensive bill, but the White House had been opposed to a bill the size House Democrats have been pushing, although the President said Friday on Rush Limbaugh's radio show that he wants a bigger package than that being offered by either party, although he did not provide details for how the funds should be allocated.
A running subplot to these talks is the Senate, which is controlled by Republicans, and would also have to pass any bill before it can be signed into law. It's not clear that any bill can make it through the upper chamber before the election, particularly a large bill, which both the House and the President now seem to want. With a limited number of time left before the election, Senate Majority Leader Mitch McConnell said he would prefer to focus on getting a new Supreme Court Justice confirmed than work on a stimulus bill.
If a bill can't be approved before the election on Nov. 3, it is unclear what incentive the three sides will have to make a deal, particularly if, as polling and betting odds suggest, former Vice President Joe Biden wins the election. This means it could be late January before a new spending bill can be passed, and then a month or more before that money starts flowing into the economy. A months-long delay is going to be hard for struggling households and small businesses to handle, which explains the market's fixation on the prospects for that bill.
A steady flow of headlines, even confusing ones that, as of Friday afternoon, make it seem like much of the week was probably wasted as talks were canceled, pivoted toward small items, and then came back to focus on a big deal, can be enough to keep the market excited. Stocks spent much of 2019 focused on prospects for a big trade deal with China, and while the deal that was ultimately signed wasn't anything close to what was initially promised, the market didn't suffer for it. It's possible we could see a similar scenario play out here where a lot of positive headlines about the progress of talks push things high enough that losses from a disappointing outcome still leave stocks higher than they were before.
The only seeming certainty at this point is that we're going to get some volatility from headlines about the progress of these negotiations in the next few weeks leading up to the election.
Another potential source of volatility over the next few weeks is earnings reports. Earnings season kicks off next week with some big names and then really picks up in earnest the following week.
It's hard to know what to expect this time around. Economic data was, on the whole, better than expected during the third quarter, but that likely won't apply to business conditions for all parts of the economy. We may see some big beats and misses, but as usual, its the forward guidance that really moves prices around. It will be interesting to see how many companies resume providing guidance, or the reasons they give for continuing to not make those predictions.
All told, the S&P 500 gained 3.84% this week, while the Nasdaq added 4.56% and the Dow Jones Industrial Average rose 3.27%.