U.S. Markets Rally Back From Steep Losses Following Stimulus Deal

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The $900 billion stimulus plan is the second largest in history

There is nothing like a 400-point swing in the stock market in one day to focus the mind, but it doesn’t beat a planetary conjunction occurring on the same day as the winter solstice. We are living in spacey times.

The day started with a 2% drop in the DJIA and the S&P 500 as investors backed away from stocks given the news out of the U.K. concerning a more contagious strain of COVID-19 that was recently identified. That overwhelmed the news of an agreement by lawmakers on the $900 billion stimulus package they agreed on yesterday evening. That bill still needs to be voted on and signed by President Trump, but the framework is set (see below).

But by mid-afternoon, U.S. equity markets roared back, erasing early losses to end the day relatively flat. As investors learned more about B.1.1.7, the new strain of the coronavirus, notably that the approved vaccines can prevent it, the selling turned to buying and sent the DJIA to a 37-point gain. Financial stocks also joined the party as real interest rates crept higher, which is good for the banking business (more below).

Tesla’s debut in the S&P 500 did not go as smoothly as the lead up to its inclusion. That typically happens when big stocks join an index given that most portfolio managers who track an index like the S&P 500 may have already bought large blocks of shares ahead of time.

To be sure, shares of Tesla (TSLA) are up 655% year-to-date, so today’s weak debut will not put a dent into its market cap.

Tesla share price

What’s in That $900 Billion Plan, Anyway?

The $900 billion stimulus plan that Congress has finally agreed upon is the second largest in history only to the CARES Act. Although the text hasn’t been released yet, here’s some of what we know the deal includes from official statements:

    • “Huge sums” for vaccine distribution logistics
    • $600 per adult and child stimulus checks for single income earners who make less than $75,000, heads-of-households who earn less than $112,500, or married couples earning less than $240,000
    • $300 per week expanded unemployment benefits
    • Over $300 billion for small businesses (PPP loans and targeted EIDL grants)
    • $82 billion for education
    • $27 billion for state highways, struggling transit agencies, Amtrak, and airports (reports say there is a total of $45 billion for transport, including $15 billion for airline payrolls)
    • $25 billion in rental assistance and extension of the eviction moratorium
    • Extension and improvement of the Employee Retention Tax Credit
    • $15 billion dedicated funding for live venues, independent movie theaters, and cultural institutions
    • $13 billion in increased SNAP and child nutrition benefits
    • $10 billion for child care assistance
    • $7 billion to increase access to broadband
    • $3.36 billion more for GAVI vaccine alliance (bringing the total aid to $4 billion)

Is It Enough?

Hardly — especially for those who have been unemployed a long time. But it’s a start, and we should expect to see another massive package proposed, and possibly passed, after the Biden administration takes office in late January. If you are interested in reading the language of the proposed bill, it’s right here.

Keep an Eye on Nominal Interest Rates

As we know, the Federal Reserve has promised to keep the federal funds rate at or near zero for the next three years. That rate has a big impact on the real interest rate, which is the interest rate that takes inflation into account. A nominal interest rate, on the other hand, refers to the interest rate before taking inflation into account. Nominal can also refer to the advertised or stated interest rate on a loan, without taking into account any fees or compounding of interest.

So while the economy is picking up steam, real interest rates are starting to rise. As Jurien Timmer of Fidelity Investments points out, the Federal Reserve may be able to keep its promise of keeping nominal interest rates low while real interest rates rise.

Why Does It Matter?

It matters because there is a huge chunk of the economy and financial markets that depend on rising interest rates. Banks, other lending institutions, and credit card companies are among them. Real rates are starting to rise as you can see in the blue line below, which is yet another reason that bank stocks are also on the rise.

Nominal and real interest rates
Chart courtesy Fidelity Investments.

Chipped Off

We’ve been talking about the massive rally in semiconductor stocks since mid-March, and it has been substantial. Left out of most of that rally has been Intel (INTC), the grandfather of semiconductors. Its industry dominance has been waning of late, and the news keeps getting worse.

Last week, Microsoft announced that it is working on in-house processor designs for use in server computers that run the company’s cloud services, adding to an industrywide effort to reduce reliance on Intel. Microsoft is using Arm Ltd. designs to produce a processor that will be used in its data centers, according to Bloomberg, and it’s also exploring using another chip that would power some of its Surface line personal computers.

That follows last month’s news that Apple will produce a new line of laptops powered by its own M1 chip instead of Intel’s processors. That put a serious schism in the 15-year relationship between the two companies, in addition to a massive dent in Intel’s stock price and future growth.

Intel share price
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