Investors Stage Manic Monday Rally as Stimulus Deal Ditches Proposed Wage Hike

Stimulus momentum, abandonment of the minimum-wage hike proposal and gangbusters manufacturing data all caused investors to flock back into equities.

Traders work on the floor Monday. (Courtney Crow/New York Stock Exchange via AP)

MANHATTAN (CN) — Wall Street likes stimulus. It also dislikes minimum wages hikes. That seems to be the message as markets exploded Monday, following news that Democrats have bailed on a proposal in the next stimulus package to up the minimum wage to $15 per hour.

Right out of the gate, the three U.S. indices jumped. The Dow Jones Industrial Average increased about 300 points in early morning trading, at one point up roughly 700 points. The Dow finished the day at 31,534 points, a 1.95% daily increase. 

The S&P 500 and Nasdaq, both of which had a rocky time last week, also participated in the bull rush, gaining 2.3% and 3%, respectively. 

Though the House passed the Biden administration’s $1.9 trillion legislative proposal early last Saturday, one of the main sticking points in the bill — the minimum wage hike — was cut out of the bill after parliamentary issues with including it. A separate proposal, to punish companies that paid below a certain wage threshold, similarly fell apart.

Democrats have vowed to keep at it. “We will not stop fighting to make a minimum wage increase a reality,” House Rules Committee Chairman Jim McGovern or Massachusetts said.

In a Monday letter to the White House, 23 lawmakers called on President Biden to refute the Senate parliamentarian’s advice and raise the federal minimum wage to $15. They noted that this is the longest stretch the minimum wage has gone without a boost. The minimum wage has remained at $7.25 since 2009.

With the stimulus spigot opened, and the minimum wage knob turned off, at least for now, investors rallied. 

“It’s starting to look like first quarter growth could exceed the strong, 4.1% growth in the fourth quarter of last year,” economic consultant Joel Naroff wrote. “Much of that can be credited to the reopening of the federal government’s stimulus spigot, which sent money flowing to businesses and households.”

Monday’s rally was a stark difference to last week, when bond yields increased at the expense of equities. The yield on 10-year Treasuries, which have increased by about 50% in the last two months, hit 1.6% last week. On Monday, however, the yields dipped down to 1.43%.

“The markets got a little spooked last week by rising interest rates, but that is because too many people actually thought the ridiculously low level of rates could be sustained,” Naroff said.

Naroff and other experts, such as ING’s chief international economist James Knightley, believe the Federal Reserve won’t be able to keep interest rates low if growth hits the expected 4.5% annual rate.

“We are looking at an economy that is picking up steam and the government turning up the heat with a new stimulus bill,” Naroff said. “If that doesn’t help investors overcome their fear of returning to normal interest rates, I don’t know what will.”

Besides good news in the world of fiscal policy, investors also had great manufacturing data on which they could hang their hat. 

The ISM manufacturing index, which rose to 60.8 from 58.7, saw its greatest increase since the recovery since the pandemic began. Respondent companies say employment is on the rise for the third straight month, hampered only by hiring challenges and absenteeism.

Further ISM prices have gained, as well, with the index marking a 4-point shift upward to 86, its highest level since July 2008. The data shows that the U.S. manufacturing sector is now doing better than China — and it could rocket even higher with coming stimulus and infrastructure funding.

“Recovery in the sector remains red-hot,” said Michael Pearce, a senior economist at Capital Economics, but he warned the data also points to “a sharp acceleration in goods inflation over the coming months.”

A third vaccine added to the mix also was welcome, albeit expected, news for Wall Street. Johnson & Johnson’s single-shot Covid-19 vaccine received emergency use authorization from the Food and Drug Administration over the weekend. The Biden administration said doses of the vaccine will start to be available as soon as Tuesday. 

The vaccine enters the market as new coronavirus infections seem to be rising again, along with the death rate. The head of the U.S. Centers for Disease Control and Prevention, Dr. Rochelle Walensky, said on Monday that the most recent seven-day average of deaths and new infections have both increased more than 2% in the last week.

According to Johns Hopkins University, more than 114 million cases of Covid-19 have been reported worldwide, with more than 2.5 million deaths. In the United States, well over 28 million Americans have contracted the disease, while 513,000 have died.

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