Axios Markets: Too much faith in Congress

1 big thing: Stock traders may be putting too much faith in Congress | Wednesday, December 16, 2020

Open in app View in browser   Presented By Goldman Sachs   Axios Markets By Dion Rabouin ·Dec 16, 2020 Good morning! Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 1,240 words, 4.7 minutes.) Today's event: Before the Fed's policy meeting at 2:30pm ET, Join Axios' Felix Salmon at 12:30pm for a virtual event on businesses making a difference during the pandemic, featuring 76ers partner and Fanatics founder/executive chairman Michael Rubin, and other guests. Register here. 🎙"The people should never rise without doing something to be remembered — something notable. And striking."     1 big thing: Stock traders may be putting too much faith in Congress Illustration: Aïda Amer/Axios   As the year comes to an end, investors find themselves in a similar position to where they were when it started: Watching a feverishly hot stock market hitting new highs and wondering if the rally is too good to be true. State of play: While stock traders remain confident the Fed will continue to provide unprecedented monetary policy stimulus, the market may need President-elect Joe Biden and a potentially divided Congress to deliver large fiscal spending packages to keep the rally alive. Why it matters: With the government on the verge of another shutdown despite worsening news on the labor market in recent weeks, getting fiscal stimulus delivered consistently in the coming years may be a greater challenge than the market is pricing. What we're hearing: "The Fed does have our back but the Fed cannot do it alone," Jurrien Timmer, director of global macro at Fidelity, told me on the latest edition of the Market Banter podcast (now with video!). "When you have a lot of debt and you have slow growth, you already have zero interest rates, you really are running out of ammo and you really do need that fiscal linkage to make that picture more complete." Between the lines: COVID-19 is increasingly threatening the economy as major metropolitan areas like New York again are considering shutdowns of nonessential business. For policymakers at all levels, "Our timing, our calendar is driven by the virus and the speed at which we achieve mass vaccination," former European Central Bank president Mario Draghi told Axios during a meeting on Friday. Yet stock market investors remain resolutely positive. The expectation that stocks will rise and risk assets will rally "is extremely consensus for the next 12 months," notes Jim Reid, strategist at Deutsche Bank Research, in a note to clients. "It's fair to say that in the 25 years I've been doing this I can't remember a time when so few (if any) disputed the central narrative." One level deeper: Bank of America's December Global Fund Manager Survey showed optimism in "risk-on" assets (equities and commodities) has seen a significant increase to a net 69% of investors, the highest since February 2011, and that a net percentage of investors are underweight cash for the first time since May 2013. Don't sleep: "In March we had the combined fiscal and monetary response, I call it the fiscal-monetary cocktail," Fidelity's Timmer said during the podcast. "We haven't seen that cocktail very often in the history of this country. You have to go back to the 1940s when the U.S. was joining World War II to get that."     Bonus chart: A bubble? Data: FactSet; Chart: Axios Visuals Whether Congress delivers or not, a growing chorus of asset managers is pointing out the "bubble" growing in certain segments of the market and the "overexuberance" of market participants. "With a combination of some the highest valuations ever seen and clear corresponding manic investor behavior, it seems clear to us that Growth stocks are indeed in a bubble," GMO asset management's Ben Inker and John Pease wrote in their latest quarterly letter. Similarly, Scott Knapp, chief market strategist at CUNA Mutual Group, warns the incredibly robust IPO and SPAC environments "could be a sign of possible overexuberance" and says he "wouldn't be surprised if we end up ultimately experiencing a melt-up before a meaningful correction."     Double bonus chart: The state of quantitative easing Reproduced from the Atlantic Council The Fed and chair Powell may not be able to do it alone, but there is more they can do, analysts say. What they're saying: "Despite a historic year of monetary policy around the world — including a cool $4 trillion committed in the US — there's a lot more room to maneuver," Josh Lipsky, director of the Atlantic Council's GeoEconomics Center, writes in a note to clients. What it means: The size of the bubbles in the above graphic from the Atlantic Council's global QE tracker represents the size of a country's GDP. How far to the right a country is shows how much quantitative easing monetary authorities have done relative to the country's size. "No one is suggesting we go all out like Japan (nearly falling off the chart) but make no mistake — if Congress fails to act on more stimulus, the Fed has more firepower. And they are not alone." "With interest rates already near zero around the world, watch out for even more ambitious quantitative easing in 2021. It may be the most important economic story of the new year." By the numbers: The Fed's balance sheet is the largest in the world at $7.3 trillion but is only 33% of U.S. GDP. That's why it sits far to the left of the Bank of Japan's balance sheet, which is 129% of GDP, even though it's smaller in overall size at $6.6 trillion. Why it matters: More QE from central banks may not do much for the real economy and Americans looking for jobs, but it could provide another serious jolt to the stock market in 2021.     A message from Goldman Sachs How to build a successful investing team     Morgan Stanley's Dennis Lynch joins Goldman Sachs' Insights from Great Investors to discuss the investment trends accelerated by the pandemic and his approach to building his investing team. Find out what makes a successful investor.     2. Catch up quick Massachusetts is set to file a lawsuit against trading platform Robinhood alleging it aggressively targeted inexperienced investors and failed to protect them. (WSJ) Eurozone business activity jumped and future expectations rose to a 32-month high in December as stronger manufacturing output growth helped to counter a further drop in service sector activity and pushed the euro to $1.22 against the dollar. (MarketWatch) The FDA granted emergency authorization to Ellume's over-the-counter antigen COVID-19 test for fully at-home use. (Press release) A coalition of state attorneys general could file a new antitrust lawsuit against Google as soon as this Thursday, according to unnamed sources. (Politico)     3. How tech is aiding the vaccine rollout Illustration: Annelise Capossela/Axios   Axios' Ina Fried writes: Technology companies including IBM, Oracle, and Salesforce are working with governments and health agencies to manage the massive task of rapidly distributing the COVID-19 vaccines. Why it matters: It's critical to make sure the limited supply of vaccines is distributed equitably and without wasting precious doses. Driving the news: Salesforce has a number of efforts to help agencies distributing the vaccine. Internationally, it is working with Gavi to help that global vaccine agency with its project to equitably distribute the vaccine in 190 countries. Closer to home, Salesforce is part of a project that consultant MTX built for the city of Chicago to manage its vaccine distribution, and which the consultant is now looking to sell to other local governments. Oracle donated a national electronic health record database and public health management applications to the federal government that can be used to detail who has been vaccinated and track any potential side effects. The data can also be used in aggregate so public officials can see at a glance where people have been vaccinated. Oracle is also working with the Tony Blair Institute to bring similar systems to Africa. IBM is offering up a range of technologies to help governments and private companies, including supply chain management software as well as an open blockchain-based approach to record and authenticate the temperature and handling of each vaccine dose, including batch- and lot-level information. Microsoft is working with a range of partners on vaccine management efforts, including consultancy Ernst & Young, which is tapping Microsoft's cloud and business services. Google said its cloud unit has extended its pandemic response to help with vaccine intelligence and is working alongside partners to deploy vaccine management solutions with state and local governments. The big picture: For tech, it's both a business opportunity and a chance for companies to tie the company to a critical societal need. Yes, but: Tech could also be positioning itself for blame if there are hiccups in these systems. (Remember the rollout of Healthcare.gov?) Go deeper     A message from Goldman Sachs What's on the minds of some of the world's great investors?     Each week, Goldman Sachs brings viewers an interview with leading private and public investors. Why it's important: Some of the world's greatest investors will provide insight on their investing philosophies and how they are approaching the new investing landscape. Explore their insights.   Thanks for reading! Quote: "The people should never rise without doing something to be remembered — something notable. And striking." Why it matters: On Dec. 16, 1773, the Sons of Liberty, a revolutionary organization founded by Samuel Adams, threw tea shipments into Boston Harbor in protest of the British imposed Tea Act. The quote comes from a passage written by U.S. founding father John Adams about the evening.   Axios thanks our partners for supporting our newsletters. Sponsorship has no influence on editorial content. 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