Shares hit record as investors see progress towards spending deal

Wall Street likes what it hears from Washington lately. The S&P 500 hit a new high on Thursday, continuing a rally helped by signs ...


Wall Street likes what it hears from Washington lately.

The S&P 500 hit a new high on Thursday, continuing a rally helped by signs of progress in spending talks that could pave the way for an injection of some $ 3 trillion into the US economy.

The index rose 0.3% to 4,549.78, its seventh consecutive day of gains and another peak after more than a month of volatile trading driven by nervousness over still faltering economic recovery and political battles in Washington.

But even the small steps of lawmakers helped end a market collapse which started in September.

Stock prices began to rise this month when congressional leaders made a deal to allow the government to avoid going over the debt ceiling, ending a deadlock that threatened to make the country unable to pay its bills. The rally has gathered momentum as investors and analysts grow confident of a government spending program using a recipe Wall Street can live on: big enough to support economic growth, but with increases. lower corporate tax than President Biden original $ 3.5 trillion spending plan.

“It looks like we’ve reached some middle ground,” said Paul Zemsky, chief investment officer, multi-asset strategies at Voya Investment Management. “The president himself has recognized that it will not be $ 3.5 trillion, it will be something less. The tax hikes will not be as big as the left really wanted them to be. “

Stock prices had risen steadily for much of the summer, hitting a series of highs and peaking on September 2. The impasse on government spending, continuous supply chain growls, rising prices for businesses and consumers and signals from the Federal Reserve that it would start to slow its stimulus efforts have all helped to undermine investor confidence. The 4.8% drop in the S&P 500 in September was its worst month since the start of the pandemic.

It caught up in October, up 5.6% this month. But it’s not just the updates from Washington that have rekindled investor optimism.

The country has seen a sharp drop in coronavirus infections in recent weeks, which once again points to the prospect that economic activity may begin to normalize. And the recent streak of business results that started in earnest this month has started off better than many analysts had expected. The big Wall Street banks, in particular, announced successful results fueled by juicy fees paid to bank negotiators, thanks to a boom in merger activity.

Elsewhere, shares of energy giants have also supported the broader stock market. The price of crude oil recently climbed above $ 80 a barrel for the first time in about seven years, resulting in an instant increase in revenues for energy companies.

But the recent rally seemed to find its balance two weeks ago. On October 6, it was learned that Sen. Mitch McConnell of Kentucky, the Republican leader, was prepared to offer a temporary reprieve allowing Congress to raise the debt ceiling. The market recovered from its morning slump, ending the day in positive territory. This week turned out to be the best on the market since August.

Once a no-brainer in Washington, raising the debt ceiling has been an increasingly controversial issue in recent years – with sometimes serious implications for the market. In August 2011, a fierce debt ceiling battle caused stock prices to plummet as investors began to consider the possibility that the United States could indeed default on its debts.

But the recent cap deal – even if it only pushed back accounts in December – suggested to investors that there was little appetite in Washington for a recovery from a decade ago.

“I think that left some pressure on the system,” said Alan McKnight, director of investments at Regions Asset Management. “What this signaled to the markets is that you can find common ground. It may not be very big. But at least they can get together.

Once the deadlock was resolved, the rally got stronger. Last Thursday, the S&P 500 jumped 1.7% – its best day in about seven months – as financial giants like Morgan Stanley and Bank of America reported stellar results.

The potential progress on a deal in Washington has only improved the outlook for investors.

“Democrats are now moving in the same direction and tough decisions are being made,” wrote Dan Clifton, analyst at Strategas Research, which monitors the policy’s impact on financial markets, in a note to clients Wednesday.

On Thursday, analysts shed light on the news that the White House and Congressional Democrats were heading towards lower corporate tax increases they had wanted to include it in the bill because they hoped to strike a deal that could whitewash the Senate. A spending deal without a corporate tax increase would be a potential boon to profits and stock prices.

“A stay of execution on higher corporate tax rates would appear to be a potentially notable development,” Daragh Maher, currency analyst at HSBC Securities, wrote Thursday in a note to clients.

A deal among Democrats on what should be a roughly $ 2 trillion spending plan would also open the door to a separate $ 1,000 billion bipartisan infrastructure plan that would go through Congress. House progressives are blocking the infrastructure bill until an agreement is reached on the bigger bill.

But the prospect of a deal has lifted the shares of major engineering and building materials companies. Terex, which makes equipment used for handling building materials like stone and asphalt, jumped more than 5% this week. Asphalt maker Vulcan Materials rose more than 4%. Dycom, which specializes in the construction and engineering of telecommunications network systems, rose more than 9%.

The renewed confidence remains fragile, for good reason. The coronavirus continues to affect business operations around the world, and the Delta variant has demonstrated just how disruptive a new iteration of the virus can be.

Another lingering concern is the higher costs businesses face for everything from raw materials to shipping to labor. If they are unable to pass these higher costs on to consumers, it will reduce their profits.

“This would be great, ”McKnight said. “It would have a big impact on the markets. “

But as the final months of the year approach – traditionally a good time for stocks – the market also has plenty of reasons to push higher.

The last few weeks of bumpy trading may have driven unsuspecting shareholders – sometimes referred to as “weak hands” on Wall Street – out of the market, offering potential bargains to long-term buyers.

“Interest rates are relatively stable. Earnings are booming. The cases of Covid, thankfully, are declining precipitously in the United States, ”Zemsky said. “The weak hands have left the markets and there are plenty of jobs. So why shouldn’t we have new heights? “

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Newsrust - US Top News: Shares hit record as investors see progress towards spending deal
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