US markets recover after large losses following stimulus deal

There’s nothing like a 400-point swing in the stock market in one day to focus the mind, but it doesn’t beat a planetary conjunction occurring on the same day as the Winter Solstice. We are living in a space age.

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The day started with a 2% drop in the DJIA and the S&P 500, with investors pulling out of shares given news from the UK of a more contagious strain of COVID-19 that was recently identified. It rocked the 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 equity markets rebounded, erasing early losses to end the day relatively stable. As investors learned more about B.1.1.7, the new strain of coronavirus, including that approved vaccines can prevent it, the sale turned to buying and sent the DJIA to a gain of 37 points. Financials also joined the party as real interest rates soared, which is good for banking (see below).

Tesla’s debut in the S&P 500 did not go as well as those that preceded its inclusion. This usually happens when large stocks join an index, since most portfolio managers who follow an index like the S&P 500 may have already bought large blocks of stocks in advance.

True, Tesla’s actions (TSLA) are up 655% year-to-date, so today’s weak start will not reduce its market cap.

What’s in this $ 900 billion plan anyway?

The $ 900 billion stimulus package that Congress finally agreed is the second largest in history only at the CARES Law. While the text has yet to be released, here’s what we know the deal includes from official statements:

• “Huge sums” for vaccine distribution logistics
• $ 600 per adult and child stimulus checks for single earners earning less than $ 75,000, heads of households earning less than $ 112,500, or married couples earning less than $ 240,000
• $ 300 per week of extended unemployment benefits
• Over $ 300 billion for small businesses (PPP ready and targeted EIDL subsidies)
• $ 82 billion for education
• $ 27 billion for state highways, distressed transit agencies, Amtrak, and airports (reports indicate there is a total of $ 45 billion for transportation, of which $ 15 billion is for transportation). airline payroll)
• $ 25 billion in rent assistance and extension of the moratorium on evictions
• Extension and improvement of Employee retention tax credit
• $ 15 billion in funding dedicated to theaters, independent cinemas and cultural institutions
• $ 13 billion increase in SNAP and nutritional benefits for children
• $ 10 billion for child care assistance
• $ 7 billion to increase broadband access
• $ 3.36 billion more for GAVI vaccine alliance (bringing total aid to $ 4 billion)

Is it sufficient?

Barely – 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 passed, after the Biden administration takes office in late January. If you are interested in reading the wording of the proposed bill, it is here.

Keep an eye on nominal interest rates

As we know, the Federal Reserve has promised to maintain the federal funds rate to zero or close to 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 may also refer to the interest rate advertised or shown on a loan, regardless of fees or the composition of interest.

So, as the economy accelerates, 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 this important?

This is important because much of the economy and financial markets depend on rising interest rates. Banks, other credit institutions and credit card companies are included. 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.

Scaled

We’re talking about the massive rally in semiconductor stocks since mid-March, and it has been substantial. Intel (INTC), the grandfather of semiconductors. Its dominance of the industry has waned in recent times, and the news keeps getting worse.

Last week Microsoft announcement that he is working on internal processor designs for use in server computers that run the company’s cloud services, adding to an industry-wide effort to reduce reliance on Intel. Microsoft uses designs from Arm Ltd. to produce a processor that will be used in its data centers, according to Bloomberg, and is also considering using another chip that would power some of its Surface line personal computers.

This follows news from last month that Apple will produce a new line of laptops powered by its own M1 chip instead of Intel processors. This put a serious schism in the 15-year relationship between the two companies, in addition to a massive cut in Intel’s stock price and future growth.