The market and Congress are locked in a high-stakes game of chicken — and who blinks first will ultimately determine where stocks go next
on Tuesday that includes a $300 federal supplement to state unemployment benefits and another round of small business aid. Meanwhile, stocks are within shouting distance of record levels, despite a three-day meltdown that pushed the Nasdaq composite into correction territory.
Jason Furman, a former top economic advisor to President Barack Obama, said the trend may have cooled the urgency among lawmakers to enact another stimulus package.recently told Business Insider ."But I think the stock market may very well be right in rising, but it just isn't telling us about the economy as a whole." The scenario heading into the fall is a"chicken or the egg situation," Seema Shah, chief strategist at Principal Global Investors, said in an interview.A strategist at the world's largest wealth manager lays out 4 election-related risks that could damage investors' portfolios — and shares how to safeguard against each one now, regardless of who wins She noted that if Congress doesn't show progress in passing stimulus come mid-September, markets will turn bearish on hopes for new aid. On the flip side, a stock slide could be just the spark to spook legislators into expediting a deal, the strategist said. Even if a stimulus deal is passed this month, the"delay effect" on when aid reaches Americans could see economic indicators turn worse before improving, according to Rich Steinberg, chief market strategist at The Colony Group. Recent executive orders from the Trump administration have yielded little immediate relief, and its unemployment program is"If we don't get a stimulus deal that gets more money back to consumers ... it's going to trickle back into retail sales and other components," Steinberg said in an interview.Congress remains on track to meet investors' expectations, but its window to approve timely aid is shrinking. The market expects a package of at least $1 trillion to be passed over the next month or so, Shah said. Waiting any longer jeopardizes a new deal in its entirety. Shah noted that governments are"increasingly reluctant" to increase their fiscal spending as their deficits surge, making debates for passing new stimulus"tougher and tougher." Should policymakers take too long and fail to pass a deal, she sees the resulting investor reconciliation likely driving a steep sell-off. "If the market was assuming [a deal] wasn't happening, there would be no way for record highs," Shah said. In Shah's best-case scenario, Congress would pass a package of at least $1.5 trillion in new aid in early September. Funds allocated to widespread programs like unemployment insurance would be sent to localities that need it most. The market wants to see"some genuine thinking behind where the money is being allocated," she said. The CARES Act already pushed the US deficit to new records, and inefficient spending would only inflame fears of a future budget crisis.GOLDMAN SACHS: Buy these 19 stocks right now for big future gains once a COVID-19 vaccine is available Still, such a bill would solidify stocks' valuations rather than push them higher, according to Shah. "Are we going to see markets driving another leg higher? I don't think so ... It will push the upper trend a little bit more, but we've seen those easy gains in the equity market," she said."The upside to the market is still quite contained, it's quite limited. There's a lot more downside potential." That downside could fuel a market reckoning akin to that seen at the start of the coronavirus pandemic, said Shah, citing the dislocation between stocks and the economy. In her mind, that makes stocks especially vulnerable to a sudden shift in sentiment. "The further the market moves [upward], the further it has to fall if it's not being driven by strong fundamentals," she said."The sudden move in the market could be really really quick considering this dislocation has been ongoing." Shah ultimately sees Congress acting before stocks dive. It remains to be seen whether weakening economic indicators, a party shift, or White House messaging prompts a compromise. But with the recent three-day skid reminding investors of March's market chaos, traders will be waiting with bated breath for any signs of a policy breakthrough.
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