Dragged-Out Stimulus Talks Send Markets on a Downswing

With Congress needing more time to finalize a stimulus package, Wall Street left new highs Thursday to close out the week on a loss. 

Speaker of the House Nancy Pelosi, D-Calif., signs a form next to Dr. Brian Monahan, attending physician Congress of the United States, after she received a Pfizer-BioNTech Covid-19 vaccine shot in Washington on Friday. (Anna Moneymaker/The New York Times via AP, Pool)

MANHATTAN (CN) — Investors swarmed indices on Friday in a heavy round of trading, but the excitement from Thursday’s record highs waned as Wall Street fretted about Congress’ inability to get a stimulus package passed.

The week for the three major U.S. indices has been largely positive, particularly on Thursday when all three exchanges hit new milestones; the Dow Jones Industrial Average hit 30,303 points, the S&P 500 struck 3,722 points, and the Nasdaq finished at 12,764 points.

On Friday, however, the Dow lost 103 points, while the S&P 500 and Nasdaq also took minor hits, dropping 12 points and 9 points, respectively.

Investors remained laser-focused on whether lawmakers can get another relief package passed. Many had hoped a deal would get done by Friday evening, but lawmakers are now expected to work over the weekend to pass another bill.

With no such legislation, 12 million Americans are scheduled to immediately lose their unemployment benefits on December 26. And with funding set to expire at midnight Friday, another government lockdown is imminent.

One major point of contention holding up the $900 billion bill had been a proposed safe harbor for companies facing liability over Covid-19 cases. Lawmakers eventually broke that proposal out from the main stimulus bill, however, and added it to another bill to help fund budget-crunched states and localities.

“This isn’t a trade-off, this isn’t tit for tat,” Remington Gregg, counsel at Public Citizen, told reporters earlier in the week. “This is being done because Mitch McConnell, and only Mitch McConnell, wants to give his corporate friends a handout.”

The Senate majority leader has been the leading proponent of a Covid liability shield but is softening his stance from earlier in the year when he called its passage a “red line” for any further stimulus.

Another sticking point seems to be whether to include language in the stimulus package to restrict the ability of the Federal Reserve, with Republican Senator Pat Toomey of Pennsylvania leading the 11th hour charge to curtail the central bank’s emergency lending abilities in 2021.

Toomey claims he wants to keep the Fed reined in so that the central bank is not politicized and pressured into lending money to specific municipalities or companies. “This is not at all an effort to in any way hamstring the Biden administration or weaken our economy,” Toomey said in a piece for Politico. 

Despite the attempts to limit the Fed — and the recent pullback of funds by Treasury Secretary Steven Mnuchin — the central bank has remained dovish in its promises of low interest rates and quantitative easing.

In its statement on Wednesday, the Federal Open Markets Committee agreed to increase its holdings of Treasury securities by at least $80 billion per month and mortgage-backed securities by at least $40 billion per month.

During a call with reporters after the Fed’s monthly meeting, Chair Jerome Powell again stressed the central bank had additional arrows in its quiver. “We have the authorities we have, and we will use them if they’re needed and if the law permits us to do so,” Powell said, adding that he does not intend “a permanent Fed presence” in the asset-purchasing arena.

Markets were relatively unmoved by the Fed’s statement.

“The FOMC statement was basically a non-event,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, though he criticized the central bank’s decision to keep buying up mortgage-backed securities. “The housing market is red hot and thus there is no need to continue buying MBS,” he wrote, adding that “the more the Fed buys, the more dysfunctional these markets become, especially the MBS market with the Fed owning more than one-third of this.”

Others also noted the Fed’s decision to keep buying up assets — known as quantitative easing (QE) — was good for market bulls. “The Fed made a very important language change that essentially tells markets that the ‘Fed Put’ of huge, monthly QE purchase is going to be here for a long time (years), and that has broad consequences for asset markets in the medium and longer term,” wrote Tom Essaye of the Sevens Report. 

Essaye noted that the economy would not likely be “back to normal” until 2022, perhaps even late 2022, meaning the Fed will remain in the business of buying assets for the next two years.

Allison Boxer, an economist at Pimco, agrees. “Even though the Fed didn’t extend asset purchases and we don’t expect them in our base case outlook, we will see the outlook for the Fed in 2021 asymmetrically tilted toward providing more accommodation if downside risks materialize,” she wrote.

Additional downside may already be here, as unemployment claims have started rising again. According to the Labor Department, 885,000 new claims were filed during the week ending December 12, more than 30,000 higher than the previous week. Coupled with 455,000 federal insurance claims under special pandemic programs, more than 1.3 Americans filed for unemployment insurance last week. 

Given the surge in new Covid cases, don’t be surprised if claims rise to more than 1 million weekly soon, said consultant Joel Naroff. “With shutdowns come layoffs, and that means unemployment claims should rise,” he said, noting that new claims could rise above 1 million per week again. “As I have argued for many months, the fourth quarter is likely to be the transition quarter that moves us from shutdown/reopening to trend growth.”

On the health front, the fourth quarter has been bittersweet, with cases of Covid-19 skyrocketing but now two vaccines primed for the public. Last week Pfizer’s vaccine was approved, and earlier this week the Food and Drug Administration recommended emergency authorization for Moderna’s vaccine.

Cases are continuing to rise, however, shattering some records. According to data compiled by Johns Hopkins University, there have been more than 75 million cases of Covid-19 worldwide, with 1.6 million deaths. In the United States, 17 million Americans have contracted the disease, while about 310,000 have died.

“When we think about the light at the end of the tunnel … we know that it is not going to be as simple as flipping a switch and everything returning to normal quickly,” said Neil Bradley, chief lobbyist for the U.S. Chamber of Commerce. 

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