To Stimulate or Not to Stimulate

December 14, 2020

Last Week in Review: To Stimulate or Not to Stimulate

Last week, a few market-moving events caused turbulence in the financial markets. Stocks and rates bounced up and down before heading into the weekend at elevated levels. The Dow Jones Industrial Average hovers near 30,000 and the 10-Year Note Yield near 1.00%.

Here are three things that caused volatility in the financial markets. Following these stories is important as they will have a big effect on the direction of both Stocks and rates in the days, weeks, and months ahead.

1.) No Stimulus Agreement: Congress has until December 21 to agree on a stimulus plan before heading into Congressional Recess. While there was previously high hopes and optimism that a deal would get done, things “got off to a bad start” on Wednesday, when Senate Majority Leader Mitch McConnell spoke and led the markets to believe both sides are far from agreement. OUCH! In response, Stocks, which were rallying on Wednesday and hit all-time highs, quickly reversed lower with the tech-laden NASDAQ experiencing sharp losses. Typically, when Stocks go lower, rates go lower.

That was not so much the case — likely because the Bond market is smarter and senses a stimulus bill will be passed. Let’s hope so. With 10 million + people still unemployed and more shutdowns causing more economic harm, we need stimulus, and we need it now.

2.) Vaccine Distribution: Margaret Keenan, a 90-year old U.K. woman became the first person on the planet to receive the COVID-19 vaccine. A lot of hard work has to be done to gather and distribute the vaccine across the globe, but the work has just begun. Stocks liked the news and rates moved higher, as both sense better days ahead.

3.) Eurodrama: The European Union reported their economy is extremely fragile and may actually contract in the 4th quarter. The textbook definition of a recession is two consecutive quarters of negative growth or contraction. This is not good news, and the U.S. is also experiencing an end-of-year slowdown when compared to the recent recovery. To offset the economic slowdown, the European Central Bank (ECB) upped their Bond-buying or quantitative-easing program. Stocks love stimulus but hate recessions. The idea that the ECB is committed to doing more stimulus to avoid a recession is a story to follow. If Stocks move higher it can be at the expense of Bonds and rates.

Bottom line: Rates have ticked up slightly from recent all-time lows. With a vaccine and more stimulus on the way, it may be difficult to see rates improve much, if at all. 

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