Here’s how to spot whether a stimulus deal will bring a ‘short-lived’ stock market bounce or a sustained rally, strategist says

Stocks look set to start 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 closing highs of $183.55 it was a “very, very bullish” sign.

“If that happens, we’ll have to change our tune rather quickly.”

The Tweet

President Trump delivered a video message on Twitter on Sunday, updating his health condition.

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The markets

After closing 134.09 points lower on Friday, the Dow Jones Industrial Average DJIA, -0.48% was set to open higher on Monday, on hopes of one final economic stimulus boost before the election. Dow futures YM00, +0.77% were 0.8% up, implying a 215-point gain at the open. S&P 500 futures ES00, +0.66% and Nasdaq futures NQ00, 0.78% were also higher. European stocks gained, with the pan-European Stoxx 600 SXXP, +0.72% index rising 0.8% and the U.K.’s FTSE 100 UKX, +0.68% up 0.8% into afternoon trading.

The buzz

Trump left Walter Reed Medical Center on Sunday evening to drive by supporters in a motorcade, before returning to hospital where he is being treated for COVID-19.

New York City’s mayor Bill de Blasio said on Sunday he has asked the state for permission to close schools and reinstate restrictions on nonessential businesses in several neighborhoods because of a resurgence of coronavirus.

Cineworld CINE, -44.10% shares were 33% lower in early trading after the world’s second-largest cinema chain said it will be suspending operations at all of its 536 Regal theaters in the U.S. and its 127 theaters in the U.K.

Scottish engineering company Weir Group WEIR, +16.17% said it has agreed to sell its oil and gas business to Caterpillar Inc for $405 million.

Pope Francis said on Sunday that the coronavirus pandemic has proven that the “magic theories” of market capitalism have failed and that the world needs a new type of politics promoting dialogue and solidarity.

Reprinted from marketwatch, the copyright all reserved by the original author.

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