Hang on to our HatsThe market action and pursuit of new highs has been predicated on two major themes.
1...The US Fed would continue to be accommodative by keeping interest rates low and also through the continuing purchase in the Open Market of US deficit financing.
2...the democrats would continue to pump trillions into the US economy and that money would go to the stock market because interest rates would continue to be very low.
Last week, The Fed Chairman said "Not so fast". The Fed will stop buying US Government debt by the end of next March and then would start increasing interest rates through 2 or 3 rate hikes. The market absorbed The Fed policy change with thought that even with a hike of say 75 basis points, interest rates would still be so low that the expected trillions in Government spending would still find a home in the stock market.
Today, Joe Manchin said he would not support the Biden Build Back Better proposal which would have pumped trillions into the US economy over the next 10 years. So in effect those trillions of stimulus are off the table for now.
This combined with The Fed action last weeks, for intents and purposes means that "the party is over".....higher interest rates and no money. Will be interesting to see how the market reacts, but a safe bet would be not well.
Lack of fiscal stimulus of this magnitude, as any first Economic student would know means less demand in the economy, lower prices and higher unemployment. In simple terms, commodity prices such as oil are likely to fall as well as the whole market. Businesses that are highly levered and in debt will suffer from lower demand and higher borrowing costs.
So hang to your hats,things could get rough for the next while depending on how this all plays out and whether the Democrats can pull a rabbit out of the hat and find a way to buy off Manchin.