Hello Trader,
This is the hardest thing to understand. After all, how hard is it to get into the minds of politicians. I need to take a shower after every time I try it.
Right now, fiscal policy is teetering on the edge of a cliff.
The House has passed a $3.5 trillion budget on top of $1 trillion "infrastructure" plan. The Democrats need just a majority to pass it in the Senate. It's going to be hard for them to do that.
Here's a shocker. The stock market likes increasing deficits. So It would be bullish for the stock market if the plans were passed in the Senate.
One of my principles of trading is that changes in pressure is more important than the pressure. For example, the world would adjust if inflation was 10% per year and that level of inflation will no longer be important. But a change from 10% to 11% would be a shock to the market. Changes in pressure are more important than the pressure.
Last year, the Federal government spent $6.5 trillion which was a massive easing of fiscal policy. But now, as I write, we are running a surplus on the Federal account! In other words, the current change in pressure is bearish for the stock market because surpluses are bearish for stocks. This is one reason why stocks are so sluggish.
We are teetering on the edge of a fiscal cliff. The fiscal situation would turn even more bearish if the Congress doesn't pass the budget in September.
But the situation could get even worse!
The Federal debt ceiling is going to cap further spending anyway. The current ceiling ends at the end of September so technically they have to pass that before they can pass the budget because the budget would bust the ceiling. So the whole situation will reach a fever pitch in the next month!
My best guess is only that, a guess. It is really too close to call. I'll let you know when it becomes clearer to me. But, right now, fiscal policy is a negative for the market!
Good Fed trading,
Courtney Smith
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