Markets began the day risk-on, with economically-sensitive stocks up, interest rates up and the price of oil up. That trend reversed itself after President Trump tweeted words investors cannot bear to hear.
The S&P 500 fell 1.4%, with a high degree of drag coming from large cap tech stocks. The Nasdaq fell 1.57%. The 10-Year Treasury yield fell to 0.75%. Yields fall when prices rise.
Generally, investors have been expecting slightly higher inflation and are increasingly comfortable that the V-shaped economic recovery will remain as such. And while the 10-Year yield fell Tuesday, it didn’t fall all the way back down to 0.66%, where it was last week.
President Trump has ordered his White House negotiators to pause talks with Congress about a stimulus bill. The bill was initially expected to be over $2 trillion with generous grants to households and small business. Investors were excited. This means for the many still unemployed, a fresh cash injection can provide yet another bridge for those consumers until there is a vaccine and small business can reopen fully. For small businesses, the cash would enable them to retain some employees.
Although the President said the stimulus talks would resume after the election, many on Wall Street have noted throughout the year that long breaks between fiscal packages are detrimental to the economy, as each day brings vulnerable small businesses closer to bankruptcy.
This threatens the current V-shape of the recovery and near-term earnings. Many are still confident in the longer-term economic outlook when the pandemic is in the rear-view mirror.
Ironically, the negative stimulus development comes on the same day Federal Reserve Chairman Jerome Powell said a lack of additional final stimulus would have dire consequences for the economic recovery.
Economically-sensitive stocks — banks, oil, manufacturers, consumer discretionary — all fell hard. The Vanguard S&P 500 Value ETF (VOOV) - Get Report fell 0.76%, in a move not as rough as that seen in many cyclical, as the fund holds defensive stocks in healthcare and consumer staples. On the defensive side of the equity market, utilities rose a bit less than 1%.
Here’s what Wall Street’s saying:
Charlie Ripley, Senior Investment Strategist, Allianz Investment Management to TheStreet:
"The market was really anticipating some stimulus to move forward. The question still remains around the timing of it. This is going to be after election type of an event. I think with regards to what we’ve seen in rates, the [political] polls haven't change fro yesterday in terms of the potential for a blue wave and more government spending and higher inflation down the road, so I don’t think that has changed. With the near-term stimulus being pushed out, that’s what’s affecting rates today.”
Steven Ricchiuto, Chief U.S. Economist, Mizuho Securities:
"Policymakers have started to be consistent in messaging that the Committee is willing to tolerate an overshoot in inflation, relative to its 2% target, to achieve maximum sustainable employment and to compensate for the undershoot in inflation during the long, June 2009-February 2020 upturn in the business cycle. This sudden consistency in messaging is important if the Fed’s new emphasis is to be seen as credible.”
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