Markets took a breather this week as the country prepared to swear in a new President. The S&P 500 fell just under 2% on the week. Though it is clear more stimulus is likely on the way, it is less certain when and in what form it will arrive. Meanwhile, virus trends continue to worsen, and the vaccination drive has not picked up much steam. There are still plenty of bricks in the wall of worry, and it is only natural that the market takes a moment to digest. This is especially true with more details on the horizon. Within a few weeks, we should see stimulus negotiations play out, Q4 earnings will have come in, and we will see whether there has meaningful progress in administering the vaccine.
This week, President-elect Biden laid out his plans for an additional $1.9 Trillion in stimulus. This includes $1,400 personal checks, money for vaccine distribution, expanded unemployment insurance, state and local aid, and a host of other Covid related needs. As part of the proposal, Biden has proposed expanding the federal minimum wage to $15/hr. The process could be complicated. Biden will start by trying to pull over 10 Republicans to pass the legislation in regular order. However, this will be a tall ask with the size of the package and provisions for increasing the minimum wage. It is more likely that stimulus will have to go through the budget reconciliation process.
Budget reconciliation is a messy animal, but it allows legislation to pass the Senate with 51 votes instead of 60. A bill going through this process must be related to revenue, expenditures, or the federal debt. It also must not increase the federal deficit after a 10-year period. Policymakers are often quite crafty in fitting their proposals within these guidelines. The bottom line is that Democrats will have quite a bit of flexibility in pushing through some of their key agenda items. The market will certainly adjust as the details are fleshed out.
On the earnings front, the numbers are starting to roll in. Banks kicked off the Q4 earnings season by smashing analyst estimates. Those reporting so far are showing that credit quality is indeed holding up better than expected in the middle of the pandemic. Banks have begun to drain the loan loss reserves they built in the early days of the crisis, with the end hopefully now in sight. We find this to be a very encouraging economic signal. We'll see what else companies have to offer in the coming weeks.
Finally, the Trump administration took steps to speed up the vaccination program this week. They are lowering the target age and are authorizing that vaccines held in reserve for a second dosage be used now. Biden plans to build on these efforts as he takes over and vaccinate 100K Americans in his first 100 days. Only time will tell if we can get there.
Preston May, CBE®
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