Wall Street Analysts See Better Chance for Stimulus Breakthrough

(Bloomberg) -- President Donald Trump's positive Covid-19 test may help bring investors the main thing they've been looking for to rekindle the stock market rally: a fresh stimulus package.

While Trump's diagnosis brought turmoil to Washington and the campaign trail, analysts on Friday said it has led to a greater likelihood Congress and the White House will reach a deal on pandemic relief before the election, which may help support equities. The S&P 500 Index, down 6% from its Sept. 2 record, has swung widely in recent weeks as investors assessed the odds of an agreement on another round of support to prop up an economy still struggling to recover from lockdowns and unemployment.

The benchmark for U.S. equities fell as much as 1.7% on Friday. It pared that loss to less than 0.5% as House Speaker Nancy Pelosi said aid negotiations with Treasury Secretary Steven Mnuchin will press ahead. The president's diagnosis might change the tenor of the talks by emphasizing the coronavirus pandemic's seriousness, and she later said airline industry relief may advance.

Trump's illness has “rapidly shifted the political environment,” Evercore ISI's Sarah Bianchi wrote in a note. “The chances for a stimulus deal have actually increased as it refocuses the conversation on the virus and gives Pelosi more leeway to worry less about the election implications of passing a bill.”

Bianchi also sees the news as “likely to benefit Democrats and increase the odds that they sweep the elections as it centers the conversation around the virus.”

Investors' concerns about the ramifications Joe Biden winning the White House and Democrats controlling both chambers of Congress have eased recently, as some have underscored the potential for more fiscal stimulus and friendlier trade relations with Democrats in charge. On Thursday, RBC said the percentage of “Biden bears” had dropped sharply in the firm's September poll.

Read more: U.S. Airlines Jump as Pelosi Sees Industry Relief Advancing

Trump testing positive might now “serve as a catalyzing event (similar to a ‘national crisis') to force the two sides together” to forge a stimulus deal, Vital Knowledge founder Adam Crisafulli said via instant message. That's especially true if Senate Majority Leader Mitch McConnell wants to ensure Amy Coney Barrett's nomination as a Supreme Court justice passes, Crisafulli added, saying that McConnell “may bite the bullet on stimulus.”

AGF Investments U.S. policy strategist Greg Valliere said that “this crisis could renew efforts to pass a pandemic relief bill,” as the economy is at risk of “flattening” without it.

Veda Partners analyst Henrietta Treyz was more skeptical, saying she remains “very dubious” that a new stimulus measure will pass before the Nov. 3 election.

“The thesis in the market now is that President Trump is on the ropes and so he will instruct Secretary Mnuchin to capitulate to Speaker Pelosi to whatever extent is necessary and then ultimately to instruct Senate Republicans to capitulate in their opposition to the Speaker's proposals as well,” Treyz wrote.

Republican Senate staff counsel didn't share that view when she spoke with them on Friday morning, Treyz said. McConnell is the “single most important person in this equation. Unless and until he becomes intimately involved in any stimulus talks, we will struggle to raise our odds of a deal passing,” she said.

In any case, “investors should not panic over the news” that Trump tested positive, Jefferies Global Equity Strategist Sean Darby wrote. It had been a “tail risk since other global leaders have contracted the virus,” he said, citing U.K. Prime Minister Boris Johnson.

Darby expects the November election will not be delayed, and said that “economic data is moving in the right direction, and U.S. financial conditions are very loose.”

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