Can Impatience Be A Virtue? Market Slumps With Stimulus Talks Still On Simmer

 | Dec 08, 2020 10:16AM ET

The waiting game that began last week continues, putting the long rally on pause. We’re an impatient lot, and when things aren’t happening quickly, the market sometimes slumps, as we’ve seen so far this week.

The main thing investors are waiting for is any sign of Congress taking action on a stimulus, the same old thing we’ve been tapping our fingers about for months even though it’s tough to get anything done in a lame-duck session. The difference now is that with earnings season basically over and the election in the rear-view mirror, there’s less corporate news for people to focus on. That puts geopolitics in the driver’s seat, which can make things unpredictable.

When life grows uncertain, volatility tends to come back into play. The CBOE Volatility Index is up this morning, along with bonds and gold, which has been on a turnaround move higher over the last few days after reaching multi-month lows in late November. Crude also had been gaining momentum and there was talk it might hit $50 a barrel, but now it’s struggling a bit.

Looking at these developments, it backs up the idea that a little “risk-off” sentiment is creeping in after most of the risk measures stepped back during November. The good thing is that the 10-year yield continues to hang around near 0.93%, not losing too much ground. Higher yields are often a sign that investors feel positive about the economy.

The early stock market softness isn’t really that big a deal. The pattern over the last few days is to sell off early, hit some lows, and then move higher into the close. We’ll see if that continues today.

The backdrop to all this is the continued sad toll of COVID-19, where U.S. caseloads remain at record levels and state shutdowns threaten to stall some of the progress made over the summer with reopening. Yesterday saw that reflected in the market as a few of the “mega-cap” tech and communications firms resumed their leadership role while cyclicals that tend to do better when the economy firms up retreated a bit. Consider keeping an eye on this relationship again today and check whether some of the major “stay-at-home” names that had been flagging come out of the woodwork.

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The data calendar looks a bit light today, but gets more interesting later this week when monthly consumer and producer prices come out. Tomorrow we’ll discuss what analysts expect those reports to bring. Here’s a hint for you veterans: It doesn’t look like a repeat of 1979.

h2 Positive Double Whammy Ahead? Maybe/h2

We’ve talked a lot about a possible U.S. stimulus, and that definitely remains front and center. What’s gotten less attention is the chance of a European stimulus. The European Central Bank (ECB) meets Thursday, and news reports say it’s likely to add emergency monetary aid on top of what it’s already done this year in response to the pandemic.

Considering Congress has to agree by Friday to keep the government open—and that a stimulus might get pulled into any legislation—it’s possible by the end of the week we could have a double-whammy in terms of good news. That means you can’t rule out a quick move up for the market. However, if either the U.S. or Europe can’t get stimulus done for one reason or another, that could be viewed very negatively overall.

A U.S. stimulus—if it comes—could even renew the bond selling seen last week and maybe give the 10-year yield a chance to climb above that elusive 1%. While it’s possible this could cause some hand-wringing in the stock market, the way higher rates often do, the Fed has been very clear it plans to keep its powder dry. It’s also said it would let inflation climb above 2% if necessary to support job growth, and so far inflation’s been a no-show (new inflation data bow later this week).

h2 Vaccine Approval Could Provide Another Tailwind/h2

Besides the ECB and Congress, consider looking out this week for possible U.S. Food and Drug Administration (FDA) approval of a COVID-19 vaccine. Some good news came this morning with the media reporting that Pfizer's (NYSE:PFE) vaccine safety data didn’t raise any concerns with U.S. regulators. Arguably, the vaccine optimism has already been built into the market quite a bit, but you can’t rule out some more money coming in from the sidelines when or if the approval news hits.

News reports earlier today said the first person was vaccinated in the U.K., which is great to hear. However, it doesn’t mean everything immediately changes, considering the logistical challenges of getting hundreds of millions of people vaccinated in the U.S. If you think back to last March when the virus began, Europe was about three to four weeks ahead, so maybe that will be the case with vaccinations, too.

There’s been a pretty steady flow of money into stocks over the last few weeks, analysts say, and the NASDAQ Composite hit another new high Monday despite the other indices falling. How much of the good news is built in may be hard to quantify, but more cash could still be out there.

Meanwhile, Treasuries aren’t giving stocks a lot of competition right now in terms of yield, and corporate bond yields remain historically low. That’s positive for companies borrowing money, but maybe not too enticing for many investors.

Speaking of companies and money, high-flying shares of Tesla (NASDAQ:TSLA) came under pressure this morning after it said it would sell shares worth $5 billion. The pressure wasn’t that much, however, maybe because people seem to have a tremendous appetite for this stock. As for TSLA’s decision to sell shares, it probably reflects the company deciding to play its hand while it’s hot.