US Stock Market Investors Buying With Confidence Knowing Stimulus Will Come Eventually

U.S. stocks rallied last week, with the S&P 500 Index posting its best weekly performance since early June, while long-term government yields rose to a four-month high. The catalyst behind the equity-market strength was the anticipation that another stimulus package will eventually be passed despite the confusing negotiations so far.

On Friday, the Trump administration increased its fiscal stimulus offer to $1.8 trillion from $1.6 trillion, which partly soothes the gap between Republicans and Democrats, but still fell short of the $2.2 trillion package the House of Representatives has already approved.

We’re of the belief that a deal for further fiscal relief is likely, even if it ends up arriving after the election, as both sides agree on the need for more spending to offset the coronavirus pandemic’s hit to incomes and certain industries, especially small businesses.

In the cash market last week, the benchmark S&P 500 Index settled at 3477.13, up 128.69 or +3.84%. The blue chip Dow Jones Industrial Average finished at 28586.90, up 904.09 or +3.27% and the tech-based NASDAQ Composite ended at 11579.94, up 504.92 or +4.56%.

In its weekly market summary, analysts at Edward Jones said, “Two forces were in the driver’s seat last week:  policy and politics. While it may be hard to tell the two apart, we think there are elements of each that pose particular implications for the market ahead. We expect politics (election) to keep a hand on the wheel in coming weeks, while policy developments (specifically, fiscal and monetary stimulus) will be a more persistent driving force behind the economic recovery ahead.”

Wall Street Betting on Biden

Rising stocks and a falling U.S. Dollar are signs that Wall Street is betting on Joe Biden to win the U.S. presidency and offer fiscal stimulus after the elections.

Several Wall Street banks forecast a stimulus package no matter which candidate wins, but say that a Biden presidency, if Democrats also retake control of the Senate, would be likely to result in a bigger one. UBS Asset Management, for example, is assigning a 75% probability of a Biden win.

“Besides possibly losing the presidency, Republicans may also lose control of the Senate as betting odds are giving Democrats a near 70% chance of taking the Senate,” Brown Brothers Harriman strategists said.

Edward Jones analysts added, “A Trump win would likely maintain the status quo in terms of lower taxes and deregulation as means to supporting the recovery. A Biden win would likely be accompanied by higher taxes (most impactfully for corporations and higher-income earners), but some of this drag could be offset by a larger infrastructure bill or fiscal package post-election.”