Massive Biden Stimulus Proposal Fails to Galvanize Wall Street

The second impeachment of Donald J. Trump and the $1.9 trillion stimulus proposal by President-elect Biden did not do much to rouse weary investors.

Vehicles queue up outside the Disneyland Resort parking for a Covid-19 vaccine in Anaheim, Calif., on Wednesday. (AP Photo/Damian Dovarganes)

MANHATTAN (CN) — Markets had a down week, flatlining as President Trump was impeached a second time and President-elect Biden’s proposed $1.9 trillion stimulus proposal brought little succor.

While investors rallied last week and each of the three indices set new records amid the deadly riot in the Capitol building on January 6, U.S. markets had simmered below those highs by Friday’s closing bell.

Even after Biden’s stimulus proposal was unveiled late Thursday, investors were not tempted into a buying mood. Most analysts had expected something worth at least $1.3 trillion, so the final proposal — which includes $1,400 payments to some citizens — was nearer the high end of expectations.

The Dow Jones Industrial Average gave up all its previous gains, finishing the week at 30,814 points, 283 shy of its previous high on January 8. The S&P 500 and Nasdaq also had underwhelming weeks coming off their highs, dropping to 3,768 points and 12,998 points, respectively.

Markets abroad also turned south later in the week, with European indices losing significantly on Friday. The pan-European Stoxx 600 dropped 1%, and markets in Germany and France did slightly worse. Markets in Asia were either flat or slightly down, though South Korea’s Kospi fell 2%. 

While the stimulus has been cheered, and indeed expected, by many investors, some worry the spending could take longer to filter through the economy. “Last month Congress approved $82 billion in education grants and $69 billion in public health funding, and those funds look likely to be used first before any additional funds are spent,” according to a research note by Goldman Sachs researchers led by Jan Hatzius. “Moreover, spending in some of these categories is likely to be driven by the need for spending — on vaccinations or testing, for example — rather than simply the amount of funding available.”

Another lingering concern has been that more stimulus could “overheat” the U.S. economy, in which aggregate demand outpaces growth, but such concerns could be overstated.

“These criticisms should be ignored,” wrote Josh Bivens, director of research at the Economic Policy Institute, noting Biden’s proposal is “highly unlikely to lead to any durable uptick in inflation or interest rates,” which are the normal indicators of an overheated economy. 

Bivens noted the Fed is primed to raise interest rates if inflation starts to rise, and that the U.S. economy is now harder to overheat since, ironically, more income is concentrated in wealthier households that are more likely to save rather than spend it.

James Knightley, chief international economist at ING, agreed, writing that “much of the additional payments to individuals is likely to be saved initially, but when the re-opening comes it could be used to fuel a consumer boom.” He added this “reinforces our view that the U.S. economy will grow by more than 5% this year.”

Regardless of the long-term impact of the stimulus, investors have plenty to be worried about in the short term. New unemployment claims are once again spiking. For the week ending January 9, more than 965,000 new claims were filed, well above the 787,000 filed the previous week. Including special federal employment programs during the pandemic, more than 1.1 million new claims were filed last week. 

This marks the 43rd straight week of initial unemployment claims coming in worse than the worst week of the Great Recession, and this recent step back has some concerned. Knightley called Thursday’s report “an awful outcome” and said people may need to brace for “another decline in jobs in January.”

Some experts are not too worried, however. “The spike in initial jobless claims comes after two below-trend readings, so it looks more like a correction than a renewed increase in the trend,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “I expect claims to fall sharply over the next couple weeks, and then to drift until the economy can reopen properly in the spring.”

Labor Department Secretary Eugene Scalia labeled the increase in unemployment a temporary one, attributable to spiking claims out of New York and California as shutdowns resume. “Vaccine distribution should facilitate another surge in employment in two to three months,” Scalia said in a statement.

Other factors also point to a slow first quarter. The National Federation of Independent Business index for small business optimism dropped 5.5 points last month, the largest one-month drop since the recovery began last spring.

“This month’s drop in small business optimism is historically very large, and most of the decline was due to the outlook of sales and business conditions in 2021,” said NFIB Chief Economist Bill Dunkelberg in a statement. “Small businesses are concerned about potential new economic policy in the new administration and the increased spread of COVID-19 that is causing renewed government-mandated business closures across the nation.”

The index had previously plummeted far lower in 2007 when the Great Recession took hold, and it skyrocketed after President Trump was elected in 2016. But the index fell sharply again last March when lockdowns occurred. 

The drop may soon reverse, however, as the Paycheck Protection Program has reopened its doors to struggling small businesses.

Businesses are also concerned about mixed messages from the Federal Reserve this week. Thomas Barkin, president of the Federal Reserve Bank of Richmond, hinted during an interview on Monday that interest rates could increase as early as mid-2022, noting that “there is some possibility that the economy could come back a bit stronger than some are expecting.”

Further, Kansas City Federal Reserve Bank President Esther George warned about inflation could soon become a larger issue with which the central bank must contend, noting goods prices have risen “quite sharply” despite aggregate inflation remains muted.

“Such a scenario does not suggest higher inflation is a near-term threat, but rather that inflation could approach the Committee’s average inflation objective more quickly than some might expect,” she said. 

Over the summer, the Fed changed its approach toward inflation, setting a long-term inflation goal of 2%. Some have speculated that, with the additional stimulus likely entering the economic bloodstream, the Fed may be poised to raise interest rates and slow its bond purchases.

Fed Chair Jerome Powell said during an online Q&A, however, that investors should expect the central bank to raise interest rates “no time soon” unless inflation started to climb precipitously. Powell also said “now is not the time to be talking about exit” from its bond-buying program.

The current Treasury market “still has far to go to match the selloff” from mid-2013, when Fed announced it was pulling back on its bond-purchasing programs, a process known as tapering, according to experts at Oxford Economics. After the Fed’s 2013 announcement, bond yields rose.

“The current selloff has been triggered by expectations for stronger economic growth, faster inflation, and increased Treasury supply due to the roll-out of the coronavirus vaccine and increased odds for additional stimulus,” Oxford lead analyst John Canavan wrote.

“In 2013, inflation expectations fell, and deficits were trending lower,” he continued. “Those differences raise the risk of a larger selloff this cycle, although the Fed’s forward guidance minimizes the risk of a repeat taper tantrum.” 

One data point that has not tapered sufficiently is the number of cases of Covid-19. According to Johns Hopkins University, 93 million cases of Covid-19 have been reported worldwide, with more than 2 million deaths, according to data compiled by Johns Hopkins University. In the United States, 23 million Americans have contracted the disease, while nearly 389,000 have died.

Worse, a new, more-transmissible variant of coronavirus has been reported out of Brazil on top of the relatively new mutation originating out of England. 

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