Market comeback's fate in the second half may be determined by Congress

Published Fri, Jun 26 20206:43 AM EDTUpdated Fri, Jun 26 20209:03 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

The next headwind for Wall Street could come straight from Washington, as Congress moves toward a new fiscal package to help the economy recover from the coronavirus shutdowns. The concerns are it may be too little, too late, and the path to get it done will likely be contentious. Strategists say the package should be approved, but not after some debate that roils markets and the end total could be anywhere between $1 trillion to $2 trillion. As the election approaches, divisions between Democrats and Republicans have been growing, and that could set the tone for the legislative process, said Julian Emanuel, head of equities and derivatives strategy at BTIG. "It may end up that stimulus gets passed, but the road to get there is going to be extremely difficult," he said. Political strategists expect Congress to come to an agreement before it leaves for August recess, and also before enhanced unemployment benefits run out at the end of July. That includes the $600 additional weekly payment to workers on unemployment, which is likely to be reduced, strategists said. Congress has already approved packages worth about $2.4 trillion, but this next one, which would have to resolve the unemployment spending issue as well as state aid, comes at a time of higher political tensions and with the added edge of the election just months away. The policy debate could become even more acute if the June employment report, due next Thursday, does not show a snap back in jobs, after the surprise 2.5 million gain in May. Negotiations are expected to intensify for the relief package when Congress returns July 21 from the July Fourth holiday. "I think it's likely we do see congressional action. The question mark: is it going to be enough? Is it going to be composed in the right way to support the economy," said Mike Pyle, BlackRock global chief investment strategist. Pyle said the concern for markets is that Congress will retrench and that future packages could become even more difficult to adopt. The phase four stimulus package comes amid worries that the rise in coronavirus cases could slow an economic rebound. A strong recovery is viewed as critical by the White House as President Donald Trump seeks re-election, and strategists say stronger growth would likely help Trump regain some momentum in the polls. That process could be troublesome for stocks this summer, with investors already worried about rising odds that Democrats could sweep Congress, as well as take the White House. With nearly 20 million people still collecting unemployment, the benefits component makes it more likely Congress will agree on a package after some compromise, strategists say. $1 trillion to $2 trillion There is also a divide in terms of how big the package should be and what it should be spent on. Goldman Sachs economists expect Congress to enact $1.5 trillion more in fiscal measures, equal to 7% of GDP. They note that the Democrats suggested a $3.4 trillion package and that Trump would support a $2 trillion package, but Senate Majority Leader Mitch McConnell would agree to spend just another $1 trillion. "Lawmakers face a series of fiscal cliffs over the next couple of months," the Goldman economists wrote. They said Congress needs to provide continued support to small businesses and should provide another round of payments to consumers, like the one that helped spur consumer spending in April and May. "An additional round of payments is apt to boost consumption in late August and September, we believe, and if not implemented would exert downward pressure on consumer spending in Q3 relative to Q2," they noted. States are also seeking more relief, on top of a preliminary $150 billion in prior funding. Stocks slumped this week on worries about a resurgence in virus cases, but recovered some ground Thursday as bank regulators eased some post-financial crisis restrictions on banks' use of capital. But the rise of new cases in the sunbelt casts doubt on how quickly the economy can snap back, particularly after New York, New Jersey and Connecticut responded to the outbreak by requiring quarantines for travelers from the hot spots. "It's a splash of cold water bringing the market back to the reality that it's very, very far from being solved, reinforcing the need for more stimulus," said Emanuel. Andy Laperriere, Cornerstone Macro's head of policy, said another issue for markets may be that some investors expect to see a much bigger package than the $1 trillion he thinks will ultimately be passed. " I think there are people who are expecting a lot bigger number. We feel like it's pretty likely that $1 trillion is the upper limit. We'll see," he said. "Definitely my sense is in talking to clients is that a lot of investors are expecting $1.5 to $2 trillion." Laperriere said he expects a compromise on the enhanced payment for the unemployed, intended to supplement state aid for the millions who abruptly lost their jobs. He expects it to be cut in half and the package could include a one time back-to-work payment proposed by Republicans. "If you don't want the unemployment benefits to create this disincentive to work, that'll be an element of what they do," he said. "I think unemployment benefits is where the sharpest differences are, but it's also an area where the compromise is kind of obvious." He expects Congress to grant states another $200 billion. Evercore strategists expect a $1.5 trillion package that should include state and local aid, a smaller round of small business grants and some temporary business tax relief in the form of credit cash-outs for the year. They also expect a modified unemployment benefits component and another round of stimulus checks. Some other items could be debated, including the election funding sought by Democrats and a Covid liability shield sought by Republicans. They expect the package could raise fourth-quarter growth year over year by a few percentage points, and should reach 6% to 6.5% of GDP. "There will still likely be more economic ground to make up in 2021 even under the best of circumstances, and there are serious downside risks from business failures, permanent unemployment, and a possible second virus wave that may counteract the bill's tailwinds," the Evercore strategists wrote. The stimulus has not all been directed smoothly. For instance, many large companies participated in the Payroll Protection Program designed for small business, and some have returned the funds. The Government Accounting Office also reported that 1.1 million deceased Americans were sent $1.4 billion in stimulus checks, as the government rushed to put money in the hands of consumers. --CNBC's Michael Bloom contributed to this report

Lights shine from the U.S. Capitol dome prior to a vote in the U.S. House of Representatives on two articles of impeachment against President Donald Trump in Washington, December 18, 2019.

Joshua Roberts | Reuters

The next headwind for Wall Street could come straight from Washington, as Congress moves toward a new fiscal package to help the economy recover from the coronavirus shutdowns.

The concerns are it may be too little, too late, and the path to get it done will likely be contentious.