The economy will be just fine without more stimulus — but markets could sell off sharply, says one top strategist
- The US economic recovery can continue without fresh stimulus, but the lack of a near-term deal could rankle markets, Seema Shah, chief strategist at Principal Global Investors, said Tuesday.
- Passing another aid package would be a "bonus" to the economy, but its rebound "is less dependent on fiscal stimulus than we originally believed," Shah said in a virtual presentation.
- Leftover Paycheck Protection Program funds and September's better-than-expected jump in retail spending suggests activity is improving healthily without fiscal support, she added.
- Markets, on the other hand, largely expect another bill and "will inevitably be disappointed" if it doesn't arrive, Shah said.
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Wall Street will fell the burn more than Main Street should Congress fail to pass new stimulus, Seema Shah, chief strategist at Principal Global Investors, said Tuesday.
Democrats and the White House have mere hours left to reach a deal on new relief spending before hitting House Speaker Nancy Pelosi's 48-hour deadline. The hastened talks come after three months of plodding negotiations and failure from both political parties to pass their own proposals. Experts ranging from famed economists to Federal Reserve officials have warned that a lack of fresh aid will curtail the US recovery.
Shah, on the other hand, considers another aid package a "bonus" to the already rebounding economy. Investors have mostly priced in a new bill being passed by February, she added, and risk assets could face weakness should those hopes be dashed.
"If we don't get that additional stim package, the market will inevitably be disappointed," she said in a virtual presentation. "The US economy is less dependent on fiscal stimulus than we originally believed."
The strategist pointed to several indicators as signs of the rebound is robust than many believe. The Paycheck Protection Program expired at the end of July with $130 billion in unused funds, suggesting eligible small businesses took what they needed and have been able to stay solvent, Shah said.
The unemployment rate, while still elevated, continues to trend lower. Retail sales jumped more than expected in September, suggesting consumer spending trends remain healthy well after stimulus measures expired.
Still, those calling the trend a V-shaped recovery are mistaken, according to Shah. While some monthly gauges such as purchasing managers' indexes showed a sharp increase after the March plunge, high-frequency indicators and metrics tracking industrial production do a better job at detailing the US recovery, she said. Activity remains well off its pre-pandemic peak and likely won't reach those levels until late 2021 or early 2022, she added.
"When you have a complete lockdown, invariably there's going to be a rebound," Shah said. "Unfortunately, a lot of those tailwinds have started to fade and it's an uphill battle now."
Principal Global Investors suggests clients hold overweight positions in US stocks as risk appetites improve and activity trends higher. Tech giants including Facebook, Apple, Microsoft, and Netflix present "unique secular growth" as the pandemic accelerates digitization and work-from-home trends, Todd Jablonski, the firm's chief investment officer, said.
Some economic scarring will likely emerge next year as more companies default on debt, Shah warned. Still, everlasting policy support from the Federal Reserve and encouraging readings from economic indicators suggest the US is bouncing back well.
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