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Wall Street surged on hopes & hypes of an early CARES Act 3.0 for $1.9T and Reddit defeat

calendar 06/02/2021 - 10:52 UTC

The U.S. stock market (Dow Jones Industrial Average/DJ-30) closed around 31148.24 Friday, inched up +0.30% on hopes & hypes of an early CARES Act 3.0 for $1.9T and Reddit tensions. Overall for the week, blue-chip DJ-30 jumped +3.89%, broader SPX-500 surged +4.65%, while tech-heavy Nasdaq Composite (NQ-200) soared +6.01%, boosted by upbeat report card (big techs) as techs are a major beneficiary of COVID/WFH and ‘K’-shaped economic recovery.

Wall Street was also upbeat as the U.S. Senate and House Democrats passed the budget resolution bill, a primary step for Biden’s COVID stimulus package of $1.9T even without Republican support (as a last resort/pressure tactics by Democrats). And the visible progress of CARES Act 3.0 (both negotiations and legislative front) also boosted the risk-on sentiment. Senate Democrats also passed a deluge of legislative amendments and filibuster rule after a marathon session (so-called ‘vote-o-rama’) to go for the nuclear option of budget reconciliation path, if Republican Senators do not ‘cooperate’ for a bipartisan package. 

Additionally, Wall Street was also boosted amid signs of synchronized global reflation/economic recovery from the corona crash, thanks to an unprecedented COVID stimulus almost all over the world. Also, the progress of COVID vaccinations, normal infections on both sides of the Atlantic (U.S.-Europe) may result in faster herd immunity and more reopening of the economy. Dow Future is also getting a boost as Redditors almost surrendered to the might of big Wall Street traders/hedge funds.

On Friday, Dow Future was also briefly buoyed as retail/discount brokerage Robinhood lifted restrictions on all mania stocks including GME; but later undercuts as GME soared, prompting a trading halt. GME/Robinhood is now becoming almost a high-frequency indicator for the U.S./global stock market as any default of Robinhood/similar small retail discount stock brokerage may invite a spiraling doomsday effect on Wall Street, causing another financial crisis.

On Friday, three Democrat Senators led by Warner also introduced a bill to amend Section 230 of the Communications Act of 1934 to ‘reaffirm civil rights, victims' rights, and consumer protection’, which may hit various social media companies such as Twitter, Facebook, etc. As a reminder, Trump criticized Section 230 and even vetoed the 2021 defense bill when it did not include a rescission of the controversial provision.

In a statement, Warner said: "When Section 230 was enacted in 1996, the Internet looked very different than it does today. A law meant to encourage service providers to develop tools and policies to support effective moderation has instead conferred sweeping immunity on online providers even when they do nothing to address foreseeable, obvious and repeated misuse of their products and services to cause harm”.

On Friday, tech-heavy Nasdaq was under stress, even after making a new high on the concern of more regulation for big techs/social media platforms, which may eventually hurt their ad revenue. Energy stocks outperformed as oil hits 13-months high (since Feb’20) on hopes of faster rebalancing

On Friday, after the mixed NFP job report, which shows the unemployment rate ticks down to 6.3%, while the U.S. economy added 49K jobs, Democrats led by Biden also reiterated an urgent passage of CARES Act 3.0 for $1.9T. Meanwhile, Pelosi committed to passing CARES Act 3.0 with or without Republican support by 15th Mar, either by an appropriate bipartisan package or through the budget reconciliation process. After brief small turbulence, Dow again got some boost on hopes of a big CARES Act 3.0. Bad News for Main Street is now good news for stimulus addicted Wall Street.

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Biden is also remained engaged in negotiations with a group of moderate Senate Republicans for a bipartisan COVID relief package (even with some compromises) to avoid legislative nightmare for the nuclear option of the budget reconciliation process. Biden’s main election promise of $15/h minimum wage may not be passed through this budget reconciliation process and even some moderate Democrats led by Manchin are against this proposal, which may hurt SMEs/small restaurants hard. In a sense, Biden’s budget reconciliation process is also heavily dependent on four conservative Senate Democrats led by Manchin.

Biden is indicating that he prefers that the bill passes with bipartisan support, but if required, he is forced to move ahead with Democrats alone, or with just a handful of ten GOP votes that fall short of the filibuster-proof 60 votes he’d need to pass legislation in regular order. Biden has consistently made the case that a big fiscal stimulus is always preferable in such a corona recession than a small/incremental-a lesson he has learned the hard way with the Obama stimulus bill (Recovery Act) during the 2008 GFC days, which many economists warned was too small.

On Friday Biden said in an address to his Democrat Senators:

I’d like to be doing it with the support of Republicans-- but they’re just not willing to go as far as I think we have to go-- If I have to choose between getting help right now to Americans who are hurting so badly and getting bogged down in a lengthy negotiation or compromising on a bill that’s up to the crisis, that’s an easy choice--I’m going to help the American people that are hurting now.

--President Obama put me in charge of the Recovery Act, and it was hard as hell to get the votes for it to begin with, and then it was hard as hell to get even the number we got.  But one thing we learned is, you know, we can’t do too much here; we can do too little.  We can do too little and sputter.

But again, the result is, it’s not just the macroeconomic impact on the economy and our ability to compete internationally; it’s people’s lives.  Real, live people are hurting, and we can fix it.  And we can fix it.  And the irony of all ironies is, when we help them, we are also helping our competitive capacity through the remainder of this decade.  I mean, it’s real.

So we got a chance to do something big here.  And I’m — and thank you for last night, yesterday, and what you’re going to be doing on this Recovery Act.  And I can hardly wait to sit down with Peter DeFazio to work on infrastructure.  This is the next big piece.

The U.S. House Speaker Pelosi, on her part also prefers for bipartisan CARES Act 3.0, even if it requires some negotiations & modifications, but at the same time is preparing all the legislative works to reconcile various bills (under the budget reconciliation process) both as leverage against Republicans and as a last resort, if they do not come in line: “--- our hope would be that we would have bipartisanship.  I think that having a reconciliation bill is necessary so that we know that – we will guarantee that – we'll have results and hopefully give us some leverage with the Republicans.  I hope that we can work together because we are going to work together”.

Bottom line:

Amid all these dramas of U.S. politics & policies, the market believes that a negotiated bipartisan CARES Act 3.0 for around $1.1T may be the reality by Mar’21. The group of ten moderate Republicans may go for some negotiations and both arrive at the middle path to pave the way for a bipartisan CARES Act 3.0 rather than the contentious budget reconciliation process.

Republicans are already under fragile conditions after Trump’s Capitol Hill shutdown and various other bellicose actions after the election defeat. Thus for political compulsion, Republicans may support CARES Act 3.0 for around the $1.1T price tag, so that both sides of the equation (fiscal pragmatism and public relief) may be fulfilled.

Biden, as an experienced politician, Senator and administrator know very well how the Capitol Hill system works and thus he intentionally made the CARES Act 3.0 plan as huge as 1.9T as after negotiation with the fiscally conservative Republicans, it will be invariably reduced by almost half.

Generally, liberal Democrat admins are keen on providing higher fiscal stimulus in the form of higher social security payments/COVID reliefs and infra building, but not very keen on tax cuts, while Republican admins are tax cut savvy and less infra stimulus heavy. The U.S. Senate filibuster rule is intended for a check & balance between these two policies (DNC-liberal and RNC-conservative).

The stimulus addicted Wall Street may continue to be under the whims & fancies of Capitol Hill politics going forward. If Biden eventually goes for the budget reconciliation process as a nuclear option, he may have to face immense difficulties in his bipartisan $4T (?) infra stimulus plan (recovery phase) with the Republicans. Although, theoretically, Biden may go for another budget reconciliation process to pass the infra stimulus in FY22 (Oct’21-Sep’22), say by Mar’22, it would be too late and too difficult as Biden has to normalize the U.S. economy before Nov’22 mid-term election for a true trifecta and strong grip over the Congress.

Technical view: SPX-500, DJ-30, and NQ-100 Futures:

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