The Usual Suspects
Doug Walters
The ups and downs of the market this week were driven by the usual cast of characters: the Fed, stimulus, and vaccine news. However, market leadership rotated.
Contributed by Doug Walters , Max Berkovich ,
Stocks were up then down this week, ending about where they started. The usual suspects were at play: the Fed, stimulus talks, and vaccine progress. But it was not the usual winners, as mega-cap growth stocks stumbled in favor of value. Biotech stocks also had a big week.
To understand market dynamics these days, a cursory understanding of monetary and fiscal policy is increasingly required. So here is a quick primer:
- Monetary policy is controlled by the Federal Reserve (“the Fed”). The Fed can stimulate the economy by lowering the Fed Funds interest rate. Right now, the rate is near zero, which makes borrowing cheap, thus promoting economic activity. In addition, the Fed keeps financial markets liquid through various asset purchasing programs (often referred to as Quantitative Easing). Support from the Fed goes a long way to explaining how the stock market has risen in one of the greatest economic shocks of all time. However, investors were underwhelmed with the Fed’s statement this week, which helped fuel the mid-week decline.
- Fiscal policy is controlled by the legislature. Congress can enact bills that provide direct payments to individuals (like the $600 enhanced unemployment benefits) or tax relief. Fiscal stimulus is at a stalemate currently, with the House supporting a 2+ Trillion dollar bill, while the Senate prefers a more modest 1 Trillion dollar bill. The President indicated his willingness to negotiate higher numbers, but the Senate does not appear willing to consider it before the election.
While the Fed’s monetary policy is effectively keeping the stock market propped up (particularly large-cap growth stocks), it is fiscal policy (and positive vaccine news) that is needed to help limit the economic fallout for smaller businesses and to see the rally expand meaningfully beyond large-cap growth.
Headlines This Week
The Fed
- The Federal Reserve restated its easy monetary policy after The Federal Open Market Committee (FOMC) meeting on Wednesday.
- Fed’s Chairman Jerome Powell expects overnight lending rates to remain near-zero until 2023.
- Powell also floated the possibility of extending the current dividend and share buyback restrictions for Banks.
Winter is Coming
- According to a PwC survey of executives at major US companies, the managers expect corporate tax rates to rise following the November election, no matter who wins.
- While Trump’s administration has not proposed any changes to the corporate tax code, many executives anticipate higher taxes to fund stimulus spending, tax deferrals, and other federal COVID-related relief.
- Higher taxes on capital gains is also being discussed on Wall Street, as many see it as a very probable outcome given the decade run of solid stock returns.
Time is Ticking
- The European Union (E.U.) is still hopeful for a Brexit deal.
- United Kingdom’s (U.K.) Prime Minister, Boris Johnson, set a deadline to strike a deal by October 15th, although the official transition from the E.U. is December 2020.
- Time is ticking. The probability of the U.K. leaving the E.U. with no deal is rising, as the country has yet to show any successful traction in negotiating a trade deal that works with the 27 E.U. countries.
Band Together
- Central banks worldwide are banding together to prop up financial markets around the globe with ample liquidity.
- The European Central Bank is keeping its easy monetary policy while relaxing the leverage regulations for the banks within the region with hopes of boosting their economy.
- The United Kingdom is following suit of the U.S. Central Bank, refraining from going into the negative rates territory.
- Japan’s Prime Minister Shinzo Abe has been succeeded by Yoshihide Suga, his right-hand man, who is widely expected to continue in Abe’s economic footsteps, giving some stability for the country, at least in economic terms.
- Japan, like many developed nations, has struggled to reignite inflation for decades, despite very accommodative monetary policy.
The Week Ahead
Facing the Music
Federal Reserve Chairman Powell will testify in front of Congress three times next week.
- On Tuesday before the House Committee on Financial Services, Wednesday before the Select Subcommittee on Coronavirus Crisis, and Thursday before the Senate Committee on Banking, Housing, and Urban Affairs.
- Secretary of the Treasury Mnuchin will be there Tuesday and Thursday as well.
- The calendar for the week is also full of speeches from Federal Reserve officials.
- The testimonies and speeches will take center stage, but durable goods orders, existing and new home sales, MBA mortgage applications, and weekly jobs numbers will catch some attention.
Can WeChat About the TikTocking Clock on the Ban?
President Trump, through the Department of Commerce, said both of the popular mobile apps, TikTok and WeChat, will be banned from being downloaded starting Sunday.
- According to estimates, there are 100 Million daily users of TikTok in the U.S., but WeChat is not as popular, as most of the reported 1.2 Billion users are in China.
- Commerce Department Secretary Wilbur Ross reiterated that the actions to ban the apps are aimed at protecting Americans and their data from the Chinese Communist Party.
- The good news for fans of the China-based apps is that the ban on the use of these apps will not take effect until November 12th.
- A chance to stay intact for TikTok wrests upon its ability to get a deal done with Oracle Corp. (ORCL) and Walmart Inc. (WMT) on ownership and make the required operational changes to avoid the ban in November.
- WeChat, which is owned by Tencent Holdings (TCEHY) does not have any way to avoid the effective shutdown at midnight on Sunday.
Party Like it’s 5781
Sundown Friday will bring in the Jewish New Year.
- On behalf of the Strategic Team, we would like to wish those celebrating a good and sweet year!
- l’shana tova tikateyvu
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