About Face on Fiscal. After a week of off again/on again fiscal talk, the final word for the week came Friday, when according to Bloomberg, “Treasury Secretary Steven Mnuchin headed into talks with House Speaker Nancy Pelosi carrying a White House offer of $1.8 trillion for economic stimulus, according to people familiar with the matter.” While it appears President Trump is now motivated to reach a compromise, there is no word whether he’ll be able to bring the deciding third (McConnell + Senate GOP) along with him.
Contested Election Fears Recede. Heightened expectations for increased market volatility in November and the prospect of a contested election have ebbed since late September, with many observers now pointing to a convincing Biden victory, along with Democratic control of the Senate, referred to as a “blue wave.” Examining long-term presidential cycles (Source: Fidelity) shows historical returns from such a combination have been sub-par in early years—perhaps due to the prospects of increased regulation and higher taxes.
However, these concerns are not resonating with investors, due to the impacts of Covid and the current state of the economy. In fact, according to a NYT article this week, a blue wave “represents the best chance to get another large injection of federal money into an economy that continues to struggle.” Wall Street strategists largely agree and see lots of positives from it.
Covid, the Inertia Killer? Debating which party is likely to champion fiscal spending after the election may be a moot point. Covid itself is challenging long-held beliefs around deficits, debt and the role of government during a time of crisis. Federal Reserve Chairman Jerome Powell himself has called on Congress to not be fearful of “over doing it” with respect to stimulus. MMT economists such as Stephanie Kelton aim to reframe how citizens think about government’s role in the economy and the benefits of using its spending power to address societal needs. Thus, “Fiscal Hawks” are a dying breed in Washington.