For Wall Street, What Happens If There Is No Stimulus?

The stimulus is on hold. One side blames the other. Wall Street’s like that honey badger in the “honey badger don’t care” video. Yeah, that’s right…they really don’t give a ____.

The nearly $3 trillion coronavirus stimulus deal includes money for states like New York. It’s not to clean up after protests, or to pay a bonus to hospital workers. Many see it as a way to stop the bloodletting in state pension plans. Worse yet, the bailout also gives states room to hold off on opening the economy.

Seeing how everything has been politicized these days — from the type of canned beans one buys, to the new SARS virus itself — any incentive to keep Democratic run states like California closed would hurt the economy. “That package is explicitly designed to accommodate extended economic shutdown,” says Brian McCarthy, macro strategist for Macrolens. “No deal is no big deal,” he says of the package the House approved and Senate leader Mitch McConnell rejected.

For the market, the only stimulus that matters is the one that gets the economy back on line.

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“We expect no renewed nationwide lockdowns, with moderate restrictions sufficient to keep outbreaks manageable,” says Mark Haefele, CIO of UBS Global Wealth Management. A bailout to states may keep restrictions in place for longer.

If reopening doesn’t continue, the jobs recovery will stall out. But if phased reopening keeps on, then the economy will continue to trace out a “V-shaped recovery” as indicated already by the S&P 500 chart. That will likely be the case even without a new, broad-based stimulus package that includes $1,200 checks to individuals again.

Market action supports this view.

Expectations for another Treasury bazooka round have been trumped by the fact that the southern states did a much better job with the coronavirus pandemic when it hit there late spring and early summer, then New York City. Had that been as bad, we would be looking at more bazooka rounds for sure. Mortality rates there were lower, thanks to mistakes learned from New York, the U.S. epicenter.

“The outlook for a skinny deal is better than it’s ever been, and yet we’re still not there,” White House Chief of Staff Mark Meadows told reporters on Wednesday. House leader Nancy Pelosi said both sides “have to try to come to an agreement now.” She suggested Democrats might go beyond their most recent offer to trim the relief package the House passed in May and come back later for the rest. “We’re willing to cut our bill in half to meet the needs right now,” she said this week during a Politico Playbook event and that seems like a good offer.

She said they would then take it up in January. But by then, unless the coronavirus is raging in the Tri-State area and we are heading back to square one, state bailouts will be impossible to get a President Trump to sign. His challenger, Joe Biden, needs to win to make that happen.

A deal is likely in the next two weeks, however, and contrary to market consensus, bigger is not better, McCarthy wrote to clients this week.

Here are the potential outcomes, ranked from the most bullish to most bearish, with what he thinks are the best odds for a new coronavirus stimulus.

• A skinny deal including $1200 stimulus checks (20%). Set equity risk to maximum!

• A skinny deal omitting $1200 stimulus checks (50%). Bullish momentum sustained.

• No deal (15%). No biggie. Buy the dip.

And lastly…

• A $2 trillion deal including more than $300 billion for state governments (15%). Sell the news.

The S&P 500 hit a fresh record high on Tuesday, having rallied around 51% since the pandemic low in March.

In another sign of the risk-on mood in markets, notes UBS’ Haefele, Italy’s sovereign borrowing premium over German Bunds returned to pre-pandemic lows this week, despite its fast-rising public debt. And the dollar continues to decline. The dollar index is down around 10% from its peak in March.

“There’s further upside in stocks,” says Haefele. “But be selective.”

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