Markets Will Ignore Impeachment — And Will Focus on Great Earnings and Huge Stimulus

by Greg Valliere, AGF Management Ltd.

Markets Will Ignore Impeachment — And Will Focus on Great Earnings and Huge Stimulus

February 8, 2021

AN ECONOMY THAT NEEDS MORE MEDICINE could be getting an overdose. The growing likelihood that a $1.5 trillion stimulus package will pass soon is driving interest rates higher, as the markets focus on the big story in Washington — spending and more spending, whether it’s needed or not.

THE IMPEACHMENT TRIAL, beginning tomorrow, will have absolutely no impact on the financial markets. New Jan. 6 riot video — and testimony — will be gripping, but there simply aren’t enough votes to convict Donald Trump.

THE MEDIA WILL FOCUS this week on the ransacking of the Capitol, but for investors the big story is the surprisingly good first quarter earnings results, which have turned positive after the Covid-induced 2020 slump.

PROGRESSIVES ARGUE THAT THE STOCK MARKET isn’t a true reflection of the economy, and to be clear — the labor market is far from healed, and more stimulus is needed, especially for small businesses and people who will lose unemployment benefits on March 14.

BUT THERE’S A GROWING UNEASINESS that $1.9 trillion is too much, since the $900 billion package that was enacted earlier this winter hasn’t been spent. Democrat Lawrence Summers, the former Treasury Secretary, threw a bombshell last week, suggesting that the Biden package is too big and risks inflation.

WE THINK THE FINAL BILL will cost about $1.5 trillion, as Biden tightens up on eligibility for stimulus checks. He and Treasury Secretary Janet Yellen are determined to “go big” and the new president has public support for a huge package. Enactment of a massive bill in March will set the tone for Biden’s administration.

A VICTORY IN MARCH will lay the groundwork for even more stimulus proposals later this year — a huge infrastructure/green spending plan that could cost trillions. Whether this can win enough support from moderate Democrats is in doubt, however.

IN THE MEANTIME, stocks are surging, the U.S. housing market is on fire, GDP looks solid this quarter, trade with Asia is booming, the manufacturing sector is recovering and — most importantly — new covid cases are dropping (despite anxiety over the variant and the maskless idiots in downtown Tampa who surely spread the disease last night).

BOTTOM LINE: The economy isn’t out of the woods, and more medicine is needed — but not $1.9 trillion, a potential overdose that could send markets into the uncharted waters of higher interest rates and a whiff of inflation.

THE BIG QUESTION: A year from now — or sooner — will the Federal Reserve be scaling back its asset purchases? If the Treasury 10-year bond yield soars past 1.5% this summer, the Fed could have a new set of problems.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

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This post was first published at the AGF Perspectives Blog.