To stimulate or to not stimulate, that is NOT the question. When I look at the stock market's new found love for some of the left behinds like Caterpillar (CAT) , Ingersoll Rand (IR) , or even U.S. Concrete (USCR) , I can see that investors have decided that it's not a matter of if but when we get a stimulus plan, because there could be a second wave of unemployment to match a second wave of illness.
Right now the situation is complicated by the Senate where there are enough Republican senators who are believer in a V shaped recovery that the prospect of a huge stimulus plan AHEAD of the election seems remote. It is a conflicted situation: you have a President claiming that the economy is coming roaring back, yet he wants to give in to the Democrats on some deal that's north of a trillion. Of course the Democrats want far more, in part because they want to bail out the states that traditionally thought to vote Democratic, and that's an anathema to both the President and the Senate. The President has shown a desire at times to give in on some state money, but not enough to please the Democrats, and Vice President Biden forced the issue last night by asking why the President hasn't pressured the Republicans in the Senate to come to the realistic table.
But in the end politicians and investors make judgments about how the election is going to go and you can see that they are betting that the Senate is going Democratic so who cares. Hence, how a stock like Caterpillar can roar into the quarter next Tuesday rather that cower while the earnings report beckons.
Now I don't mind people trying to game the election as a play on infrastructure AS LONG AS they don't hold out for the results. I keep thinking about all the money that was lost on U.S. Concrete, the largest concrete company, and I would sell that stock right into the election. I don't mind a Caterpillar or an Ingersoll or even a Cummins (CMI) coming in, but those are more because I genuinely believe there is a rebound in commodities and China, and they can thrive if Biden wins and the strength in China continues. Remember you have to believe that there will be more, maybe a lot more, business with China and NOT business with the federal government.
But let me give you another way to play the inevitable stimulus: the banks. Hear me out. As these cyclical stocks have been going up, bonds have been going down in value and up in yield, betting that there is going to be more economic activity creating demand for money as well as the need for the government to borrow even more than it has to fund the stimulus plan.
There are algorithms out there, set to this phenomenon of higher rates, that translate into a belief that banks will have higher earnings so therefore buy their stocks. I think these relationships are tenuous in reality, but the algos presume lots of things that don't pan out. It's the journey, not the outcome, that matters, though, which brings me to the major banks that will be winners: JP Morgan (JPM) , Bank of America (BAC) , Goldman Sachs (GS) , and Morgan Stanley (MS) . The first two really do react to higher rates, the second two not too much. No matter, both Goldman and Morgan Stanley are actually geared to their businesses and their businesses are on fire.
So, if you want to "play" the stimulus go with the banks. They are cheap and we learned this week with that big move up in rates, they will too.