At Least For Now, It Pays To Be Aggressive…

Election results now indicate that split government is likely with the Senate likely to remain under the control of the Republicans. In the past, this has been a bullish outcome for the stock market.

Source: LPL Research

Markets generally like split government because that means Congress can’t accomplish much. The need to develop bipartisan consensus prevents sweeping changes which are possible when one party controls Congress.

But this is not a time when gridlock is likely to be helpful. As we all know, everyday life has been disrupted by a pandemic that remains far from contained.

Source: The New York Times

There is some good news in the chart above. Doctors have made progress in treating the disease, resulting in a lower fatality rate. However, the situation is still serious.

Federal Reserve Chairman Jerome Powell believes additional economic stimulus is needed. At a press conference last week, he said

“Further [economic] support is likely to be needed to avoid further spread of the virus and help individuals who, with the expiration of the CARES Act payments, are seeing their savings dwindle.” Powell was referring to the Coronavirus Aid, Relief, and Economic Security Act, passed in March, which increased unemployment benefits, provided loans for small businesses and sent $1,200 relief checks to most Americans.”

Powell’s comments came after the Fed held a meeting of the policymaking Federal Open Market Committee. FOMC meetings end with a statement and this time the Fed noted, “The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

This means the Fed will do what it can, but the Fed isn’t powerful enough to solve the economic problems the country faces. The Fed needs help from Congress, and according to CNBC

“The two most powerful people in Congress — at least for the next two months — renewed their calls for coronavirus stimulus on Friday.

Senate Majority Leader Mitch McConnell, R-Ky., again called for a targeted aid package. …

“I think it reinforces the argument that I’ve been making for the last few months, that something smaller – rather than throwing another $3 trillion at this issue – is more appropriate,” he told reporters, according to Reuters. …

Meanwhile, House Speaker Nancy Pelosi called for Republicans to restart aid talks that fell apart before the 2020 election. She told reporters that the “imperative to act could not be greater” after the U.S. posted a record of more than 120,000 new Covid-19 infections on Thursday.

Still, she said a narrow bill “doesn’t appeal to me at all.”

Closing Thoughts

Summing up, Chairman Powell says Congress must act. Senator McConnell is willing to act on a narrow bill, which Speaker Pelosi says isn’t appealing.

We seem to have the stalemate in Congress, which the stock market usually likes. But this time is different, and a stalemate could be devastating to the economy.

This is a problem for the long run. In the short run, stocks turned bullish as the chart of the S&P 500 shows.

The price target is about 5% above the current price, although bulls could push prices up more than that.

In the short term, it should pay off to be aggressive.

But in the long run, I will remain cautious.

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