‘Make That Trade!’ Biden Plans Unprecedented Stimulus for US Economy

The revolving doors to the White House, the Senate, and the House are set to welcome president Joe Biden and his administration. Now that the Democrats control the executive and the legislative branches of government, they have carte blanche to push through unprecedented economic stimuli to benefit all Americans. Taking center stage is a massive $1.9 trillion stimulus on top of the $900 billion stimulus recently passed by Congress under President Trump. Combined with the $2.9 trillion stimulus in 2020, the US economy is now flush with cash.

All that money has plenty of different directions to go, including Wall Street and Main Street. Americans across the board are anticipating $1400 stimulus checks to go with the $600 released in December 2020. Dubbed the ‘American Rescue Plan,’ the stimulus money is intended to get the economy moving again, by empowering consumers who have faced sweeping job losses, cutbacks, and personal difficulties.

The stock markets have reacted to these stimuli as expected – bullishly. A snapshot of the US financial markets confirms the impact of the stimulus, and what’s to come. The 1-year change for the major US indices reflects strong gains for the NASDAQ composite index (38.44%), the S&P 500 Index (13.17%), and the Dow Jones Industrial Average (5%).

Markets across Europe, the Middle East, and Asia have performed poorly over the past 1 year, owing to the government enforced lockdowns vis-a-vis the pandemic. The best performing European market over the past 1 year was the DAX (+2.38%). This begs the question: How will all the stimulus money impact the stock markets, and demand for gold?

What Happens When Central Banks Start Flooding the Market with Trillions of Dollars?

Monetary stimulus is designed to assist struggling American households who through no fault of their own were furloughed, or now face tremendous economic uncertainty. SMEs across the board are cutting costs, and letting people go. In December 2020, hiring rates in the US dropped for the first time in 7 months. Industries affected most by the pandemic include service-related businesses, travel and tourism, restaurants and bars.

It’s not only low income families struggling against adversity; it’s middle income earners too. Several measures have been proposed, including raising unemployment benefits to $400 weekly, and increasing the minimum wage to at least $15 per hour. All of these bold initiatives have yet to be passed by Congress, and signed into law by the President.

The effects of these massive stimuli will reverberate across the economy. There are definite winners and losers from massive spending. The Deficit/GDP ratio is already 15%, and monetary supply growth has increased by 25%. Inflationary concerns are growing, but for now the stock markets are shrugging off the prospect of higher prices and welcoming the stimulus. Low-income earners will benefit most from the stimulus, but every action has a reaction in the financial markets.

Currently, the Federal Reserve Bank has indicated no change to interest rates. This is surprising, given that bond yields are increasing. Multiple economists are concerned that the infusion of trillions of dollars into the economy will ultimately lead to rising prices, and nullify the intent of the stimulus packages. Equity markets and housing markets have shown tremendous resilience, and growth in recent months. State governments will be getting their fair share of stimulus money, as ‘financial healing’ kicks off in earnest.

TheFed’s bond-buying program continues in earnest as quantitative easing goes into overdrive. Millions of Americans remain out of work, and the unemployment rate is at pre-pandemic numbers. If the proposed economic boom kicks in, inflation will likely result before the end of the year. Markets across the US rallied in 2020, and bullish sentiment continues into 2021.

Analysts point to high valuations in the stock markets that are not supported by the fundamentals. The CARES Act was like a steroid shot for the market. The Paycheck Protection Program (PPP) ensured that at least some of the $1200 + $600 checks found a way to stock markets. Brokerages across the board reported increased registrations and trading activity. Americans are certainly taking to stay-at-home work/life by actively engaging in the financial markets. This will likely continue with an additional $1400 stimulus check.

Which Stocks Will Benefit?

Source: StockCharts.com SPX 500 Large Cap Index

Major US banks are set to benefit over the short-term, thanks to their ability to borrow money at short-term interest rates, and lending that money out over the long-term at higher rates. The biggest US banks should all see an uptick in stock price performance. Bank of America (NYSE: BAC) has a market capitalization of $285.563 billion, and the performance outlook for the stock is bullish over the short-term, mid-term, and long-term.

Wells Fargo & Company (NYSE: WFC) has a market capitalization of $132.469 billion, with a medium-term and long-term bullish performance outlook. Much the same is true for Citigroup (NYSE: C) with a market cap of $133.77 billion, and a medium-term bullish outlook. Energy efficient stocks will also benefit from the Biden administration. Companies like Tesla stand in good stead with a green energy-focused Presidency, House, and Senate

Analysis of bank stocks provides interesting insights. For example, BAC has climbed from November lows of under $24 per share to $33 per share. The stock price is higher than its short term moving average (50-day MA), and the long-term moving average (200-day MA) of $29.04 and $25.26 respectively. Technical analysis of BAC, using the Ichimoku Cloud confirms bullish momentum moving forward.

Indeed, experts at Bank of America attested to the benefit of passing the stimulus, without which a recession would have occurred. In a similar way, WFC stock, and C stock are also up sharply since the November 2020 lows. Bollinger Bands indicate that the run on bank stocks is likely to continue as momentum is clearly on rising prices for bank stocks.

Source: StockCharts AAPL

Besides bank stocks, there are plenty of other stocks to watch, including (NASDAQ: BKNG), Renesola Ltd (NYSE: SOL), Snap Inc (NYSE: SNAP), and Apple Inc (NASDAQ: AAPL).Pictured above, AAPL is currently trading around $127.14 per share [January 18, 2021]. It is bullish, compared to the 50-day moving average of $124.24 and 200-day moving average of $103.77 per share.

Bollinger Bands for Apple indicate a slight tightening,and stabilisation of prices at a much higher level than the lows recorded in July and August 2020. As the world’s most valuable company, AAPL is on the rise once again.  Momentum indicators such as Ichimoku Cloud tend to suggest that AAPL is set for additional gains.

Which Sectors of The Stock Market Will Flop?

The shift away from crude oil and natural gas to green energy will cripple the oil industry and all the stocks that populate it. If these companies don’t start switching to alternative energy investments they will stagnate. WTI crude oil is currently trading around $52.09 per barrel, while Brent crude oil is trading around $54.76 per barrel [January 18, 2021].

The long-term charts of companies like Exxon Mobil Corp, Chevron Corporation, Royal Dutch Shell all point in the same direction – decline. In fact, these major multinational companies are at their worst levels in 10 years. US oil consumption is flattening out, while that of global oil consumption is increasing. Overall, nonrenewable energy sources such as oil and natural gas are long-term bearish, and best avoided. The global focus is on clean energy, not oil and natural gas.

Other long duration assets such as biotech stocks will likely slump over the short-term. Given that these stocks are discounted to the present, makes them unattractive to investors right now. However, any attempts to expand the Affordable Care Act will work to the advantage of biotech stocks, and pharmaceutical stocks, because people have greater access to healthcare.

The lukewarm reaction of stocks to the stimulus plan is predicated on the notion that additional stimulus will invariably result in additional taxes. If lawmakers in Congress require that taxes be raised in order to pay for the income redistribution, stocks will slump. The cruise ship industry, hotel industry, and entertainment industries still have a ways to go before a recovery is on the cards.

The strongest-performing sectors include many household names. The likes of shopify, Nvidia, cryoport, Pinduoduo, and Albemarle were considered winners in 2020. The biggest losers were airlines such as Boeing, and United, real estate and retail operations such as Simon, and oil and gas industries like British Petroleum.

Overall, the stocks which outperformed market expectations included freight and logistics, basic materials, Internet retail, software applications, and semiconductors. Heading into 2021, the S&P 500 index was up 16.3%, and growth continues. There are ‘moral hazard’ concerns with any big stimulus. Prior to the pandemic, approximately 20% of public companies were operational, but unable to repay their debts. After the pandemic hit, that number swelled to 32%.

How will the Stimulus Affect Demand for Gold?

Source: MarketWatch SPDR GLD

Traders and investors tend to buy gold when stock markets are performing poorly. The pandemic hit the brakes on the economy, and gold benefited. During uncertain times, gold becomes the go-to commodity, as it functions as a store of value. With trillions of dollars in stimulus money finding its way into the markets and households, there is no threat of a recession anytime soon. Gold prices such as GLD are off their highs, and trading at weaker levels.

When the Fed decides to raise interest rates once again, possibly to curb inflation, gold will again get hit. Since gold is not an interest-bearing commodity, it doesn’t benefit investors the same way that interest earning bonds do. As the 10-year yields on bonds continues to increase, capital will exit gold stocks, ETFs, and holdings and move to the bond markets, and interest-bearing accounts. That the gold price forecast is bearish is par for the course under current conditions.

It is against this backdrop of change and uncertainty that trillions of dollars in stimulus will weave its way into the fabric of the American economy through households and businesses. How that plays out in the stock markets remains to be seen, but for now all signs are positive.