A Stimulus Deal Probably Won’t Happen. The Stock Market Doesn’t Need It Anyway. - Barron's

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The stock market remains riveted to the back-and-forth on a possible Covid-relief bill but didn’t let the fact that a deal probably won’t happen impact it--all thee major indexes finished the day higher. Maybe the stock market doesn’t need a stimulus deal after all?

The Dow Jones Industrial Average advanced 35.20 points, or 0.1%, while the S&P 500 rose 0.5%, and the Nasdaq Composite gained 1.4%.

The headlines alternated between good and bad all day long. Good, because House Speaker Nancy Pelosi and the White House continued to talk throughout the day; bad because all the comments seemed to suggest that the gap between the two sides might be too big to close. By the end of the day, it certainly appeared that a deal would not get done.

No matter. The market still finished higher. So either investors think that a deal will still happen or maybe the market is strong enough to handle a no-deal economy.

RBC economist Tom Porcelli thinks its the latter. “Stimulus talks continued on the hill and the back-and-forth as to whether we are closer or further apart on an agreement remained rampant,” he writes. “But the bigger question here is not whether we will get stimulus, but whether we even need stimulus at all.”

Porcelli has his caveats. For instance, “small businesses absolutely need a longer financial bridge to get through the pandemic,” he explains. And if coronavirus forces shutdowns again, all bets are off.

Still, other parts of the economy are doing just fine. Households, for instance, ended the second quarter with a net worth of $119 trillion, the highest ever. That contrasts with the financial crisis, where it took five years for household net worth to return to pre-crisis levels. He also suspects that the job market will continue to improve in the months ahead. “As long as the recovery continues apace and we don’t have a relapse in Covid as flu season kicks into high gear (more shutdowns, unemployment rises etc.) then, in our view, we don’t need more household stimulus,” he writes.

At the same time, Thursday’s ISM manufacturing survey, though disappointing, showed that manufacturing continues to do just fine. The new orders component was in particularly fine form despite falling from 60.2 from 67.6 “So what we have witnessed over the last two months in new orders is a reflection of real underlying strength,” Porcelli writes. “In fact ISM respondent comments drove home that point. There were more comments that included ‘booming’ and ‘increasingly significantly’ and ‘strong’ than anything describing the opposite.”

Strange then, that it was the tech-heavy Nasdaq that led the market higher, not the more cyclically oriented Dow Jones Industrial Average. ”The divergence between the relatively strong tech sector and the rest of the market was the most interesting trend today on Wall Street,” writes Gorilla Trades strategist Ken Berman. “Compared to Monday’s broad rally, today’s performance was much less convincing, especially in the cyclical sectors, but the tech sector’s strength might be enough to turn the tide and unleash the next leg of the bull market.”

If there is a next leg.

Write to Ben Levisohn at Ben.Levisohn@barrons.com

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A Stimulus Deal Probably Won’t Happen. The Stock Market Doesn’t Need It Anyway. - Barron's
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