There is nothing quite like a 400 point swing of the stock market in one day to focus the mind, but it does not beat a planetary conjunction occurring on the same day as the winter solstice. We live in a space age.
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The day started with a 2% drop in the DJIA and S&P 500, with investors pulling out of shares amid news from the UK of a more contagious strain of COVID-19 recently identified. It swamped news of a deal by lawmakers on the $ 900 billion stimulus package they agreed to last night. This bill has yet to be voted on and signed by President Trump, but the framework is set (see below).
But by mid-afternoon, US stock markets rallied, erasing early losses to end the day relatively stable. As investors learned more about B.1.1.7, the new strain of coronavirus, including how approved vaccines can prevent it, the sale turned to buying and sent the DJIA to a gain of 37 points. Financial stocks have also joined the party as real interest rates have skyrocketed, which is good for banking (see below).
Tesla’s debut in the S&P 500 didn’t go as well as the run-up to its inclusion. This usually happens when large stocks join an index, as most portfolio managers who follow an index like the S&P 500 may have already bought large blocks of stocks in advance.
Granted, Tesla (TSLA) shares have risen 655% year-to-date, so today’s weak start won’t reduce its market cap.
What is in this $ 900 billion plan anyway?
The $ 900 billion stimulus package that Congress finally agreed to is the second-largest in history after the CARES Act. While the text has yet to be released, here are some of what we know the deal includes in official statements:
- “Huge sums” for the logistics of vaccine distribution
- $ 600 per adult and child stimulus check for single earners earning less than $ 75,000, heads of household earning less than $ 112,500 or married couples earning less than $ 240,000
- $ 300 per week of increased unemployment benefits
- Over $ 300 billion for small businesses (PPP loans and targeted EIDL grants)
- 82 billion dollars for education
- $ 27 billion for national highways, struggling transit agencies, Amtrak and airports (reports indicate there is a total of $ 45 billion for transportation, including $ 15 billion for wages airlines)
- $ 25 billion in housing assistance and extension of the moratorium on evictions
- Extension and improvement of the employee retention tax credit
- $ 15 billion in funding dedicated to theaters, independent cinemas and cultural institutions
- $ 13 billion in increased SNAP and child nutrition benefits
- $ 10 billion for child care assistance
- $ 7 billion to improve broadband access
- $ 3.36 billion more for the GAVI vaccine alliance (bringing total aid to $ 4 billion)
Is it sufficient?
Almost not – especially for those who have been unemployed for a long time. But it’s a start, and we should expect to see another massive package proposed, and possibly adopted, after the Biden administration takes office at the end of January. If you want to read the wording of the proposed bill, it’s here.
Keep an eye on nominal interest rates
As we know, the Federal Reserve has promised to keep the fed funds rate at or near zero for the next three years. This rate has a significant 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 interest rate advertised or declared on a loan, without considering fees or compound interest.
So as the economy picks up speed, real interest rates start to rise. As Jurien Timmer of Fidelity Investments points out, the Federal Reserve may be able to deliver on its promise to keep nominal interest rates low while real interest rates rise.
Why is it important?
This is important because much of the economy and the financial markets depend on rising interest rates. Banks, other credit institutions and credit card companies are among them. Real rates are starting to rise as you can see from the blue line below which is another reason bank stocks are on the rise as well.
We’re talking about the massive rally in semiconductor stocks since mid-March, and it has been substantial. Intel (INTC), the grandfather of semiconductors, did not participate in most of this rally. Its dominance of the industry has waned in recent times, and the news keeps getting worse.
Last week, Microsoft announced that it was working on internal processor designs for use in server computers that run the company’s cloud services, in addition to industry-wide efforts to reduce dependency at Intel. According to Bloomberg, Microsoft uses designs from Arm Ltd. to produce a processor that will be used in its data centers, and is also considering using another chip that would power some of its Surface line personal computers.
This follows last month’s announcement that Apple will be producing a new line of laptops powered by its own M1 chip instead of Intel’s processors. This put a serious schism in the 15-year relationship between the two companies, on top of a massive drop in Intel’s stock price and future growth.