Stocks have started the week in positive fashion, on renewed hopes of a new stimulus deal.
President Donald Trump’s health also remains in focus as seemingly encouraging updates have also calmed the markets. With the election less than a month away, public opinion polls have swung further in favor of former Vice President Joe Biden. The heightened prospect of a non-contested outcome has also buoyed investors.
House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin have consulted Federal Reserve Chair Jerome Powell about their stimulus plan talks, Politico reported, indicating that a deal may be close.
In our call of the day, Miller Tabak & Co’s lead strategist Matt Maley said that any near-term bounce from a new fiscal plan would be “short-lived.”
Maley said Trump’s positive COVID-19 test improved the chances of a new stimulus boost, as it gave both sides the opportunity to concede ground without losing face.
However, he warned multiple factors meant any pop fueled by a deal would be brief.
“We believe an agreement on a new fiscal plan is likely, but we’re not so sure it will help the stock market rally in a sustainable way. The market is still quite overvalued and the combination of the weakening employment picture plus a second wave of the virus does not bode well for any improvement for the ‘E’ part [earnings] of the P/E ratio going forward,” Maley said.
“More importantly, history shows us that stimulus programs play a much bigger role as a catalyst for a strong/sustained rally when the stock market is flat on its back…not after a strong six-month rally,” he said, noting that the S&P 500 was still more than 50% above its March lows,” he said.
He added that another “down-leg” to the September correction will come in October before we see a sustainable rally in stocks.
But the strategist said Miller Tabak & Co one important indicator — chip stocks — would signal whether they were wrong. “The chip stocks have been a very important leadership group for the broad stock market, so it’s action over the coming days and weeks should be vitally important.”
He said if the SMH semiconductor ETF can break above its September closing highs of $183.55 it was “very, very bullish on several different levels.”
“If that happens, we’ll have to change our tune rather quickly.”
This article originally appeared on MarketWatch.
