A divided government after another polarizing election season isn’t exactly the perfect recipe for a robust new fiscal stimulus plan that counterbalances the debilitating effects on the U.S. economy from the COVID-19 pandemic.
And that has some top folks on Wall Street pondering the prospect for a double-dip recession in early 2021.
“If we do not get the fiscal expansion in the next few months or late January when the whole government is in the new seats, the risks, indeed, will rise that we will see a higher probability of a double-dip [recession],” Apollo Global Management chief economist Torsten Slok said on Yahoo Finance Live. “Europe is having that because of the lockdown they are going through. But in the U.S., we have this need for fiscal expansion that if it doesn’t come the risk of a recession would indeed increase.”
Despite the outcome of the presidential election still hanging in the balance on Wednesday, the initial move in stocks post Election Day suggests little near-term worry of a double-dip recession. The Dow Jones Industrial Average exploded more than 800 points in early afternoon trading, with sizable gains being notched in the Nasdaq Composite and S&P 500 as well. Investors plowed into risky areas of the market such as high-beta tech names Facebook, Amazon and DocuSign.
That said, it’s very possible the market quickly shifts its attention back to the state of the U.S. economy once the presidential race is decided — and not like what they see coming down the pike for two reasons.
First, a president Joe Biden could mean renewed lockdowns across the country as a way to get the COVID-19 pandemic under control. That would be like wrapping an anchor around a U.S. economy that roared back to life in the third quarter with 33.1% annualized GDP growth amid loosening mobility restrictions. GDP growth fell 5% and 31.4% in the first and second quarters, respectively, as the pandemic kicked into overdrive.
BMO Capital Markets strategist Brian Belski tells Yahoo Finance, Democratic governors could become more aggressive on lockdowns if Biden is in the White House. Economic growth fears may be ratcheted higher in such a scenario.
Meanwhile, that aforementioned divided government may push out a different kind of stimulus plan — leaving the economy to worsen (see today’s under-whelming October ADP jobs report for signs of this one). And when a plan is agreed upon, it could be far less than the $3 trillion some on the Street expected under a “blue wave.” Goldman Sachs speculates a divided-government stimulus could come in around $1 trillion.
“Fiscal stimulus is likely forthcoming, even if delayed. The economy should continue to move forward, albeit with fits and starts,” says SunTrust Chief markets strategist Keith Lerner, who is staying upbeat on stocks post-election.
We’ll see if one of those “fits” is a double-dip recession in first quarter 2021.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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