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Follow The Bouncing Stimulus Ball

Posted by lplresearch

Stimulus talks in Washington, DC, are getting a lot of attention from investors—and for good reason. The midpoint of the two offers—roughly $1.6 trillion from the White House and $2.2 trillion from US House Democrats—is about 9% of last year’s US gross domestic product (source: Bureau of Labor Statistics). That’s a big deal in terms of potential impact on the economy and markets.

We see stock market performance playing a role in President Donald Trump’s election chances. Historically when stocks rise heading into elections, incumbents tend to get re-elected—although at the same time, recessions tend to bring a change. Given how sensitive the market has been to the on-again-off-again stimulus talks in Washington, we would expect Trump’s interest in getting something done to be very high right now. The S&P 500 Index is up about 4% since August 3, which based on history favors the incumbent, but there’s a long way to go between now and November 3, and the recent recession may favor former Vice President Joe Biden.

“A compromise on a big stimulus package in Washington could potentially deliver another October surprise, but the odds are against it as Election Day approaches,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “The optics of getting nothing done aren’t great on either side, and there are a lot of close Senate races right now, suggesting there still may be a glimmer of hope for a deal by November 3.”

For Republicans, the mini COVID-19 outbreak in the White House provides an added motive, in addition to the possibility of a wave of layoffs just ahead of the election, which won’t help the president or swing-state Republican Senators. On the other hand, the Democrats may be looking at the polls and thinking they will get more of their priorities if they wait. They also may not want to give Trump a signing ceremony right before most votes are cast. Plus, a piecemeal “skinny” deal now would reduce their leverage to get more of their wish list items.

Still, there is bipartisan support for a deal, moderates on both sides of the aisle are pushing for it, and the need is clearly there (ask Federal Reserve Chairman Jerome Powell), so we remain hopeful that something is passed this year. Unemployment remains near 8%, and many families and small businesses are still reeling from the effects of the pandemic that are not going to end soon unfortunately.

Looking beyond the election, we see these scenarios as reasonable possible outcomes:

Trump wins and Republicans retain the Senate. A deal similar to the Republicans’ offer around $1.5 trillion would be likely but far from assured.

Democrats sweep but keep the filibuster in place. A deal in the $1.5 to $2 trillion range becomes very likely. Without the filibuster, a potential deal may get even bigger.

Biden wins but Republicans retain the Senate. There is a risk of no deal at all in this gridlock scenario, though moderates may come through with a “skinny” deal.

Republican sweep. This scenario would almost certainly lead to a skinny deal including supplemental jobless benefits, small business aid, corporate liability protections, and some COVID-19-related funding. We view this as the most unlikely scenario given Democrats’ stronghold on the House this cycle.

Finally, for those looking for a bill to pass in the lame duck session of Congress if Biden potentially wins, we would argue that the Democrats may wait until Biden takes office to attribute it more to him.

Bottom line, this could go a lot of different directions. We’ll be watching closely. Stay tuned.

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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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All index and market data from FactSet and MarketWatch.

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