Markets set high hopes for Biden’s relief plan

Stocks are soaring to new highs as President Biden and congressional Democrats plow ahead with plans to approve another massive coronavirus relief bill.

All three major U.S. stock indexes set new records Monday after their best week in months amid growing optimism for Biden’s $1.9 trillion economic aid plan. The Dow Jones Industrial Average rose 237 points to a new record high of 31,385, while the S&P 500 and Nasdaq composite rose 0.8 percent and 1 percent respectively, setting new closing highs.

Wall Street traders are betting that another round of stimulus could spark an economic rebound by the start of summer. Strong corporate earnings reports and vaccine distribution progress have also added fuel to the recent rally, pushing record-high stock valuations to eye-popping heights.

Economists are generally in agreement that more fiscal aid and higher vaccination rates will help shake the U.S. out of the coronavirus-induced recession. But Wall Street’s expensive bet on a seamless recovery from here on out could spell trouble if the boost they expect from Biden’s bill takes too long to materialize.

“The market is either set up for this wonderful run of recalibration of the economy post-pandemic, or set up for enormous disappointment,” said Daniel Alpert, managing partner at New York investment firm Westwood Capital.

Biden and congressional Democrats have marched in lockstep to approve nearly $2 trillion in aid through a budget process that would require a simple majority of votes in each chamber. While proposals to raise the minimum wage and pare down stimulus checks remain contentious, Democrats on the whole have been unified behind the basic structure of Biden’s plan and appear willing to pass it as soon as possible.

Democrats are racing to send their bill to Biden by the beginning of March — likely too late to avoid a lapse in expanded unemployment benefits, but only three months after former President Trump signed a $900 billion bipartisan relief measure.

As Democrats have rallied behind Biden’s proposal, markets have surged on hopes it will provide the funding needed to guide the U.S. through the final months of the pandemic before widespread vaccination brings back some semblance of normal life. Biden administration officials have also expressed confidence that their stimulus plan could help millions of struggling Americans and businesses rebound quickly once the pandemic is contained.

“There’s absolutely no reason why we should suffer through a long, slow recovery,” said Treasury Secretary Janet Yellen during a Sunday interview with CBS.

Investors are already positioning themselves for the payoff. Stocks in pandemic-ravaged industries made some of the biggest gains of the past week, largely on hopes that vaccines and stimulus will revive travel and hospitality.

“Look at the types of stocks that caught a tailwind late last week and it’s obvious the reopening hypothesis continues to gain strength,” wrote JJ Kinahan, chief market strategist at TD Ameritrade, in Monday research note that cited companies like Darden Restaurants, Starbucks, Wynn Resorts, MGM Resorts, Southwest Airlines and Hilton Hotels.

Those stocks “all threw a party, putting Wall Street in vacation mode,” Kinahan added. “Meanwhile, the technology sector brought up the rear on Friday despite many of us still being locked down with our laptops.”

The market’s broad success also reflects a degree of confidence in how major publicly traded businesses could benefit from federal stimulus, whether through reduced unemployment driving up demand for consumer goods or a rush of money into the market.

Even so, some Wall Street veterans fear that some traders could be overestimating the payoff from Biden’s proposal, especially as the economy faces several more months of COVID-19 restrictions as more variants of the virus prove challenging to control.

Some economists have expressed concerns about how effective fiscal stimulus would be with major industries still sidelined by the pandemic. Money that can’t be spent safely on dining, entertainment, travel or hospitality may end up in savings accounts or spent on goods produced abroad by companies with greater ability to adjust prices, diminishing the potential impact of Biden’s relief plan.

“Those aspects of the economy are not coming back too quickly. They’re going to be beset by long term problems because of just the nature of a shutdown,” Alpert said.

“People are sitting on their asses at home, and are not are not able to do what they normally would do. They buy appliances, televisions, what have you, with whatever extra money they might have,” he added. “If you think that that’s going to be enough of an ocean to float the economy, you’re sadly mistaken.”

Some traders may also be vulnerable to a setback in the stimulus bill’s progress. Democrats cannot afford a single defection if no Republican senators agree to support their package, which could pose a tricky needle to thread when negotiators hammer out legislative details.

The market, however, will still have near-zero Federal Reserve interest rates and the prospect of a 2021 rebound to spur another rally.

“We see both compelling opportunities in the stock market and the potential for a solid year of returns, as would be consistent with the second year of a bull market in equities, but we do expect significantly more volatility along the way,” wrote Andrew Slimmon, managing director at Morgan Stanley, in a Friday analysis.