The stimulus package likely to be approved by Congress this weekend is expected to be a big dud as far as the stock market is concerned.
Investors are skeptical that the new plan will deliver better results than the previous efforts to shore up the financial sector over the past six months. As the markets wait for signs that these trillion-dollar-plus programs will make a difference, the whole discussion is both tiresome and distracting at the same time, says Steven Sheldon, CFA and principal at SMS Capital Management.
The stock market hasn't been particularly favorably to the plan so far. The
Dow Jones Industrial Average
is down roughly 10% year-to-date, the
is almost 8% lower, and the
has given back 3%. Even with the stimulus package now set to fall out of the major headlines, observers say the market will not be able to easily shake off its malaise.
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"I don't want to be gloomy, but I don't see the market bouncing back to a significant degree," says Richard Sparks, senior equity analyst with Schaeffer's Investment Research. "Right now, the path of least resistance is down. This cloud will be hanging around for a while, and it's all going to be predicated on having specific solutions put forth in the plan that begin to work."
After some give and take in the negotiation process, the entire stimulus plan is now priced at $789.5 billion and is expected to pass both chambers of Congress before the end of the weekend. President Barack Obama will sign it into law shortly thereafter, seemingly ending the stimulus saga that has played out since the start of the year.
Once enacted, investors will still have to wrestle with the effects of government plans for up to a year and perhaps longer, according to market analysts. As a result, analysts say that equities will likely trade in a very tight range for the foreseeable future.
Most worrisome is that financial stocks have continued to tank following the unveiling of Geithner's plan. For the week,
has slid 11.2%,
has lost 10%,
Bank of America
has fallen 5.4% and
is down 3.9%.
"The trend at the moment seems sideways at best," says SMS Capital's Sheldon. "We're getting used to being below 8,000 on the Dow and we could continue to drift lower if earnings are terrible. Investors aren't able to put their arms around anything that's going to happen in the next three to six months that is going to change that."
The Troubled Asset Relief Program, or TARP, shows how this might play out. Since the original TARP plan was unveiled in September, the market has gone on a rollercoaster ride, courtesy of government moves. The most notable example came Sept. 29 after the House of Representatives failed to pass the package, sending the market into a tailspin. Since that time, the major U.S. averages have fallen about 30%.
"The market is probably growing tired of
stimulus talk," Sheldon says. "Dealing with government remedy seems to be becoming old hat quickly. We've been totally set up for it and it keeps happening over and over again."
What's scary, says Doug DeGroote, managing director for United Wealth Management, is that the unfavorable market reaction to
, the original TARP plan and
Geithner's financial bailout package
could signal that more government action, sure to come under the new administration, will stretch the market's anxiety out for a year or more.
"The biggest issue we face is if this package doesn't contribute to some emotional and actual financial relief in the markets, in 8 months to a year from now we could be looking at another $1 trillion we'll need to stimulate the economy," DeGroote warns. "If that happens, we're going to continue to live under a cloud of major problems going forward. If this doesn't get to the bottom line and fix the issues at hand, we'll be having the same conversation we've had from October of last year until today."
Sparks, from Schaeffer's Investment Research, argues that the market has performed so weak because it wants real solutions. Thus far, he says, the U.S. government hasn't offered any up.
"The market is going to be looking for a set of absolutes it can then weigh in on," Sparks says. "Until then, that uncertainty will be a weight on the market."
Ideally, investors will be able to turn their focus back to earnings, he adds. "That's the long-term driver that is responsible for stock prices, but we can't seem to get all of this other stuff out of the way. It's not going to happen anytime soon. The economic numbers come in one at a time, and they're clearly a byproduct of how effective the plan will be in working. The earnings will only follow after that."
DeGroote says that investors have taken their eye off the ball, and until the focus returns to what's ailing the stock market, things will not change.
"The de-leveraging of the economy is going to continue," DeGroote says. "We have to unwind this tremendous overhead hanging over us. That's another part that is going to be a fight. As banks go through another round of unwinding, what we've fixed today with the banks is only going to be that much bigger a year later."