Stimulus: Let Me See If I've Got This Straight
I took the red eye back to DC from California Thursday night/Friday morning and went directly top a three-hour meeting in an hermetically sealed room.
The news as I left LAX was that the president was going to announce a stimulus plan the next day, that is, weeks ahead of the original schedule that had him revealing his ideas during the State of the Union; the White House and congressional Democrats seemed to be playing better in the same sandbox and that, contrary to many expectations (including mine) a bipartisan deal might be possible; Fed Chairman Ben Bernanke had endorsed of a fiscal stimulus; and the Fed seemed poised to add a 50 basis point reduction on the monetary side.
The president ultimately endorsed a $145 billion plan, which was more than many had been expecting. The more encouraging part of the announcement, however, was that the White House seemed to be dropping what many had assumed would be an absolute insistence that the tax cuts set to expire in 2010 be extended as part of the stimulus package. That would have been a deal breaker for many in Congress and the fact that it wasn't included in the president's package made it even more likely that a bipartisan bill could be enacted quickly.
I assumed that this was what Wall Street wanted to hear and that the stock market would have a good, perhaps even a very good day. So you can imagine my surprise when, instead of going up, the Dow Jones Industrial Average fell...substantially.
So let me see if I've got this straight: policymakers do what everyone thinks the market wants and the market responds very negatively.
I know better than to try to explain the stock market's performance with a single event or situation.
But this seems to be pretty simple: investors don't think much of the stimulus package emerging from Washington.
Given that confidence in the financial markets and liqudity in capital markets seems to be what is most important economically, this might not be all that surprising. The plans coming from Washington are mostly "trickle up," that is, the markets will benefit indirectly form increased consumer spending. Wall Street may be telling policymakers that this may be good for them politically but economically it won't do much of anything.
So what does Wall Street want?
It can't be the overall size of the package. The $145 billion proposed by teh White House is in the range most economists sahy is needed.
It can't be the timing. The Bush announcement accelerated the process by about two weeks, and congressional Republicans and Democrats as well as the White House are talking about getting something in place by early February, which is light speed by Washington standards.
It's not hard tro speculate, therefore, that Wall Street doesn't think much of what elected officials are calling "stimulus." Investors must not be looking at an $800 per person tax refund and accelerated corporate depreciation as doing much to reverse the current economic problems.