By David Randall
NEW YORK (Reuters) - A proposed $1.9 trillion coronavirus relief stimulus package from President-elect Joe Biden may prove a double-edged sword for investors, sustaining optimism for further economic revival while raising worries over how the United States will pay for it all.
The stimulus package, unveiled by Biden on Thursday, has been widely anticipated by Wall Street and has helped lift the broad S&P 500 index nearly 3% in the week since Democratic challengers won both of Georgia's U.S. Senate seats, giving Democrats full control of Congress.
Yet those moves have been mirrored by a slide in Treasuries, due in part to expectations that the government will need to fund the spending with more debt issuance, pushing yields of benchmark 10-year notes to their highest levels since early March and nudging borrowing costs throughout the economy higher. Bond yields move inversely to prices.
"Right now markets are celebrating the additional stimulus and see it as a stronger bridge to a fully reopened economy," said Jeff Buchbinder, equity strategist for LPL Financial (NASDAQ:LPLA).
"On the other side of it there's the chance that markets will have to pay for this in the form of sharply higher interest rates or tax hikes that could cap equity valuations," he said.
Stock valuations are already concerning some investors, who worry that earnings will have to be exceptionally strong in the coming year to justify the lofty multiples. The S&P 500 is trading at 22.3 times forward earnings estimates, near its all-time high of 24.4 from March 2000, according to FactSet.
The S&P 500 dipped nearly 0.4% on Thursday, and is up approximately 1.1% since the start of January. The year's rally has been led largely by cyclical stocks that benefit from a stimulus package, including banks, which are up over 10% for the year to date.
Meanwhile, last year's winners such as the technology sector are down nearly 1% over the same time. Rising yields threaten to weigh on the companies with longer-duration cash flows such as tech and growth shares.
SLOW VACCINE ROLLOUT
Biden's plan to stimulate the economy through a rescue package comes at a time when a surge in coronavirus cases is forcing companies and investors to pare back their estimates for how soon the pandemic will end.
Initial unemployment claims rose to 965,000 last week, the Labor Department said on Thursday, their highest levels since August and well above the 795,000 anticipated by economists polled by Reuters. Overall, job losses in December fell for the first time in eight months.
Rising bond yields, meanwhile, are spurring concerns of looming inflation once the economy begins to recover. Federal Reserve Chairman Jerome Powell said in a speech on Thursday he does not expect the central bank to begin trimming its monthly bond purchases "too early."
"Now is not the time to be talking about exit," he said.
Biden's expected stimulus plan is "in line with what the market expected," and will likely be followed by additional packages focused on infrastructure spending and other priorities, said Randy Frederick, vice president of trading and derivatives, Schwab Center for Financial Research.
The underwhelming pace of coronavirus immunizations in the United States is delaying economic reopening and increasing the need for more stimulus measures, though corporations and investors will likely face higher tax rates later in the year as a result of the extra spending, Frederick said.
"The vaccine rollout has been slower than expected just about everywhere," he said.
Esty Dwek, head of global market strategy at Natixis Investment Managers, said she expects the equity market to stumble later this year as investors start to price in the possibility of higher corporate and individual tax rates that the new administration may push through.
"There's a necessity today that overrides the long-term concern," she said. "There is a worry about inflation coming but I don't see it happening soon."