Wall Street Stumbles Over Still-Dragging Stimulus Talks

A prolonged political stalemate over the next stimulus has begun to weigh down stocks, and some investors fear a Big Tech bubble could be coming. 

Amanda Wood, 23, waits to fight an impending eviction notice July 31, 2020, at the Greater Columbus Convention Center in Columbus, Ohio. Wood lost her job at a claims management company in early April. The following day, the mother of a 6-month-old found out she was pregnant again. Now, she is two months behind rent and can’t figure out a way to make ends meet. (AP Photo/Farnoush Amiri)

MANHATTAN (CN) — With little in the way of economic indicators, Tuesday’s markets remained muted for most of the day before ending on a slightly positive note. 

By the closing bell, the Dow Jones Industrial Average gained 165 points, a 0.6% increase, while the S&P 500 and Nasdaq both increased about 0.35%. 

Technology stocks, which rallied last week and on Monday after huge jumps in earnings among several Big Tech companies, pulled back, however. Shares of Microsoft, Google’s parent company Alphabet, Twitter, and Facebook all dropped Tuesday. Apple managed to gain 0.6%.

In an investor’s note, AxiTrader Chief Global Market Strategist Stephen Innes said he believes “investors are already inoculated from the virus while camping under the tech umbrella.” He added that tech bulls have been boosted by “the primary thesis that the market remains lightly positioned in stocks that are at risk to the virus and that the wall of money argument continues to resonate.”

Some speculate a bubble may be in the making. More than half of 307 investors surveyed by DataTrek think that Big Tech stocks are in an investment bubble. “Calling +20% of the S&P 500 a ‘bubble’ is serious business, so seeing the split at just 6% over/under is quite striking,” DataTrek analysts Nicholas Colas and Jessica Rabe wrote.

Four out of five of the survey’s respondents said they expect Big Tech stocks to outperform the S&P 500 over the next year, on average, while even more — 85% — expect them to outperform the S&P 500 over the next decade. “Bubble or no bubble, respondents have a lot of confidence in Big Tech stocks,” they wrote.

The gains by Big Tech have been a nice distraction from the stalemate on Capitol Hill, where the Trump administration has failed to broker an agreement on a fourth stimulus package. 

Republicans have accused Democrats of holding up the stimulus package with unrelated wish list. “Senate Republicans proposed a major rescue package: A trillion dollars for kids, jobs, and healthcare,” Senate Majority Leader Mitch McConnell tweeted on Tuesday. “But Democrats are blocking it all.”

The Kentucky senator later told the press he doesn’t expect the same amount of consensus as during the previous stimulus packages, but that he will support “wherever this thing settles” between Democrats and the Trump administration.

Democrats say, however, the sides remain far apart on some key provisions. “It’s unbelievable that seven months into this crisis, Democrats still have to argue with Republicans about delivering enough support for testing, tracing, and our health care system in the middle of a pandemic,” tweeted Senator Minority Leader Chuck Schumer.

Additional unemployment benefits during the pandemic expired last week, while small businesses have until the end of this week to apply for loans under the Paycheck Protection Program. 

One institution running herd on Congress to get a deal done is the Federal Reserve, where many of its governors and individual bank presidents have called for fiscal relief. 

In remarks to reporters on Monday, Chicago Federal Reserve Bank President Charles Evans warned that “aggregate demand trouble is brewing” as various stimulus programs — including the $600 plus-up unemployment benefits — expire.

“The punchline ought to be, “the ball is in Congress’ court,’” Evans said. “If we go very long without somehow addressing the reduction and evaporation of that support, I think it’s going to show up in lower aggregate demand, and that would be very costly for the economy, individuals, households, people.”

Most investors seem confident something will get done on the stimulus front, but the timing of exactly when a relief package is passed is becoming increasingly concerning for some. 

“So far the markets have blithely ignored the brewing political and economic risks of a no-deal scenario partly because such an outcome would be so clearly disastrous to the U.S. economy, where 40% of all households who rented could not pay their rent bill last month,” Boris Schlossberg of BK Asset Management wrote in an investor’s note.

“But the longer issue remains unresolved the more nervous the markets will become and it’s not at all inconceivable that equities could be setting up for another micro crash if politicians dither on the issue of fiscal relief.”

The Senate is scheduled to leave for August recess at the end of the week, but the recess could be postponed if no deal is reached.

More than 18.3 million people have been confirmed infected with Covid-19 since the beginning of the year, and nearly 696,000 have died, according to data compiled by Johns Hopkins University. In the United States, there have been 4.7 million confirmed cases with 156,000 deaths.

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