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The House Passes Government Spending Bill, Next Stimulus Bill Faces New Hurdle

The House of Representatives reached an agreement with the White House on terms of a spending bill to keep the federal government funded until December 11th. The last sticking point was aid to farmers which was resolved. Avoiding a government shutdown will eliminate one risk this fall while still dealing with the pandemic, economy, and election. The bill will now move onto the Senate. CNBC NYT

The Federal Reserve released a report stating that the initial government fiscal response seemed to ease the strain on families. But many of the programs and support have ended and many believe more fiscal measures are necessary to support those most affected and to sustain the recovery. Federal Reserve CNBC

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Are the FAANGM Companies Tech Companies?

Many news outlets are using the acronym, FAANGM to describe the big "technology" stocks. It stands for Facebook, Amazon, Apple, Netflix, Google, and Microsoft. But these are not all tech stocks and represent a broader spectrum of the economy. Out of this group, only Microsoft and Apple are listed in the Information Technology sector of the S&P 500 Index. Amazon is a member of the Consumer Discretionary sector and Facebook, Netflix, and Google are part of the Communication Services sector. Wikipedia

No one would argue the FAANGM companies heavily use technology. In fact, many of them are leveraging technology to deliver a better experience for clients and grow market share. This is historically what companies have done. In the late '70s, Home Box Office (HBO – now owned by AT&T), was the first operating subscription television service offered on cable and satellite. It was a communication services/entertainment company leveraging new technologies and now competes with Netflix in streaming and creating content. Wikipedia

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The Promises and Perils of Fast-Tracking Covid-19 Vaccines

The pressure to speed up the development of Covid-19 vaccines is tremendous. Everyone understands why. An effective, widely available, and utilized Covid-19 vaccine is the health and economic holy grail. Sustained economic recovery depends on it. The US stock market has been remarkably resilient but probably trades at levels that assume an effective vaccine is available relatively soon.

By fast-tracking, we mean making a vaccine available to the public or at least to some before the normal FDA testing process is complete. We are encouraged to read that respected Dr. Anthony Fauci, the National Institute of Allergy and Infectious Diseases Director believes that overwhelmingly positive trial results may justify fast-tracking. CNN The FDA announced that it may not require completion of the standard phase three trial before giving its approval. CNBC History teaches us however that rushing a vaccine to market is not without risk. CNN

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The Federal Reserve Announces a Major Policy Change

The Federal Reserve has had an official annual inflation target of 2% in place since 2012, but the roots of that policy go back to the mid-1990s. This means that by using the Fed's main tools of short-term interest rates and bank lending, it tries to cap inflation at 2%. The goal is economic price stability. By keeping inflation low, the Fed hopes to avoid having to take aggressive measures to combat high inflation which can cause a severe recession. St. Louis Fed Brookings Institute

Over the last decade, the Fed has struggled to even get inflation to 2%, with it running at about 1.5%. Too little inflation has been the concern, not too much. The Chair of the Fed, Jerome Powell, announced a major policy change this week with a new official target being "average inflation" of 2%. This may sound nuanced and not that impactful, but it is big news. This means if inflation has been running below the target for a while, the Fed will now allow it to rise above the target for some time as well. WSJ  CNBC Bloomberg

How does this impact investors and citizens? Allowing inflation to run higher means keeping short-term rates lower for longer along with more favorable bank lending leading to a stronger economy with lower unemployment. For investors, this could mean lower short-term bond and cash yields and potentially better earnings for company stocks. Investors will be watching as more details come out of the Federal Reserve in the coming weeks and months. Bloomberg

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VIX Suggests Stock Investors Not Unusually “Fearful”

US stock market investors are a resilient bunch. You might think that the combination of a serious pandemic and a hotly divided electorate on the eve of a historic election would raise investor anxiety to high levels. Subject to change on a moment’s notice in our fast-paced world, investors are nevertheless keeping their cool.

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The Democratic Ticket is Set and Wall Street Takes Notice-But Does it Matter?

Leading up to a Presidential election, there is always speculation on the economic impact depending on which party wins. History has shown no matter which party is in the White House there is little correlation to overall stock market returns. Forbes This year the speculation was that large government tax and spending proposals by potential Democratic candidates could possibly hurt the economy or stock market returns. But after months of speculation, Presidential hopeful Joe Biden chose Sen. Kamala Harris as his Democratic running mate. In her previous government positions, she was viewed as a moderate. Her as the potential VP may have eased the concerns of investors and businesses and many on Wall Street welcomed her selection. CNBC WSJ

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The Big Four:  Stimulus 2.0; Vaccines; Schools and Elections

Four storylines rival each other in importance. The faltering US economy needs fiscal oxygen quickly, keeping the stimulus negotiations in the headlines. Since the development and distribution of an effective Covid-19 vaccine is the key to ending our public health, social, and economic quagmire, we monitor vaccine developments daily. Family life in the US may be most impacted immediately by the reopening of schools. Not only is the well-being of our country’s students and children at stake, but many parents will be unable to return to normal work schedules until their children are back safely in school. Then the November elections loom ever closer, bringing major policy implications and potential challenges to the functioning of our democratic institutions and national sovereignty.

  • Stimulus Negotiations: The most recent stimulus negotiation news has been positive. Washington Post Talks between the White House and the Democratic leadership are progressing. Senator McConnell is signaling a willingness to accept the agreements reached by the White House and Democratic leadership. CNBC It is not a done deal, but we believe that there is a good chance of an agreement being finalized by the end of next week. As I mentioned in the last Coffee Notes, I take heart that compromise between those who fundamentally disagree is still possible. How else does a democracy function?

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Masks, Tech Companies and Stimulus Take Center Stage

The last two months virus cases have been spiking in much of the south and west, causing business closures. This may have have led to an increase in initial jobless claims for the first time since late March. AP News As bad as that news seems, it appears to have jolted much of the nation into accepting wearing masks to prevent the spread of the virus and keep the economy open. Evidence is mounting on the positive effects of wearing masks and research is also starting to show that it may also protect the wearer. NPR USA Today It may even reduce the severity of symptoms if one comes into contact and catches the virus. NYT Emphasizing the link of masks = fewer virus cases = a better economy, Goldman Sachs research indicates that a national mask mandate would save the U.S. economy from a GDP loss of 5%. Market Watch

In D.C. lawmakers are turning their attention to the large tech companies and the next stimulus package. The large tech companies have been booming the last decade but even more so during the pandemic. They are political targets due to their size, privacy issues, potential anti-competitive practices, and the fact many of them pay few, or even zero, taxes. They will be in front of Congress defending their actions. Don't be surprised if the large profitable companies are eventually subjected to a minimum tax, much like the alternative minimum tax for individuals. Greg Valliere WSJ Fast Company

Meanwhile, budget talks continued in Congress to bridge the Senate's recently released $1T stimulus bill with the House's May $3T bill. The biggest sticking points are additional unemployment benefits and aid to state and local governments. Most economists and investors believe a stimulus package is necessary to support the economy and expect a deal. With expanded unemployment benefits ending this week, there will be pressure to make a deal soon. Congress knows what's at stake economically and politically, with the election looming, so that should be enough motivation to get a deal done around the August 7th Congressional summer recess. Forbes

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Upcoming Stimulus Bill (Hint: Billions Are Chump Change)

Virtually everyone in Washington agrees that another mega-sized stimulus bill is needed to keep the tenuous US economy in a recovery mode and prevent economic cardiac arrest. Time is of the essence. The expanded unemployment benefit stops at the end of July, increasing the financial pressure on our most vulnerable. The Congressional summer vacation begins on August 7th, which will motivate everyone to get a bill done. New York Times

The challenge? There is substantial disagreement over the stimulus priorities. Washington Post Republicans are not yet in full agreement internally but will insist on liability protection for employers who encourage or require workers to return to work. Democrats want a massive stimulus package ($3 trillion-plus?) with extended unemployment benefits and substantial aid for hospitals, state and local governments, and education. The White House is arguing for a payroll tax cut. Greg Valliere

We can sit back and watch the Washington sausage being made over the next two weeks. This will be Washington at its best and worst. The rhetoric may get ugly, but we are optimistic that a deal will get done. Expect compromise. Agree or disagree with their policies, the key players (i.e., McConnell, Pelosi/Schumer and Mnuchin) are all dealmakers. Some thorny issues will need to be resolved, including whether school funding will be contingent on return to campus/school rooms to force reopening and whether unemployment benefits need to be modified to incentivize a return to work. Look for a bill with a final tab closer to $2 trillion than to $1 trillion (i.e., deficit “smeshaficit”).

Could we get a modest relief rally in the stock market when a deal is reached? Or is the prospect of a large stimulus package already baked into current prices? The devil is likely to be in the details, as the markets will assess the impact of the various provisions. But a failure to reach agreement would not be good.

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