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Why are stocks up today?

Summary:
The obvious answer is that no one knows for sure. But let’s discuss some options: Bloomberg points to expectations of fiscal stimulus.  But what news do we have today that would make fiscal stimulus more likely?  One can argue that the Georgia election results increased the likelihood of more stimulus, but that information was fully priced in yesterday morning, and indeed mostly priced in Tuesday night (when stock futures declined.) Another possibility is the turmoil on Capital Hill yesterday.  You might expect that sort of chaos to hurt stocks, and indeed usually it would.  But in this case, one side effect seems to be a weakening of what one might call “Trumpism”.   Maybe that boosted stocks. A counterargument is that President Trump was good for stocks.  But

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The obvious answer is that no one knows for sure. But let’s discuss some options:

Bloomberg points to expectations of fiscal stimulus.  But what news do we have today that would make fiscal stimulus more likely?  One can argue that the Georgia election results increased the likelihood of more stimulus, but that information was fully priced in yesterday morning, and indeed mostly priced in Tuesday night (when stock futures declined.)

Another possibility is the turmoil on Capital Hill yesterday.  You might expect that sort of chaos to hurt stocks, and indeed usually it would.  But in this case, one side effect seems to be a weakening of what one might call “Trumpism”.   Maybe that boosted stocks.

A counterargument is that President Trump was good for stocks.  But it’s always important to think in terms of effects at the margin.  The Republican agenda of tax cuts and deregulation was probably good for stocks.  But that sort of policy would likely be continued by future GOP nominees.  On the other hand, Trump’s signature issues such as protectionism and immigration restriction were less popular on Wall Street.

Stock traders might view the week’s turmoil as being likely to nudge the GOP from Trump-style conservatism to a more palatable Mitt Romney approach (although I don’t think he would lead that movement.)  In addition, if Trump becomes less of a political force then the GOP may be better able to regain support from moderate voters, a prospect that Wall Street might view favorably.

I realize that this is all speculation on my part, but I would not rule out the possibility that this stock rally is about more than just the Georgia election.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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