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Fed urging for more fiscal support is a ‘siren call’ for U.S. leaders: Washington Policy Analyst

Election results continue to come in as more votes get counted. Raymond James Washington Policy Analyst Ed Mills joins Yahoo Finance Live to discuss.

Video Transcript

AKIKO FUJITA: Let's bring in our first guest for the hour. We've got Ed Mills, who is a Washington Policy Analyst at Raymond James. Ed, it's good to talk to you today.

Let's start with what the market has been pricing in here. You look at the market action right now, the Dow down slightly here, but we did see that rally immediately after Tuesday, sort of on the expectation, potentially, of a Biden presidency, but a divided Congress. Is that what you're seeing in terms of how investors are moving forward?

ED MILLS: The market is absolutely pricing in a divided government, Akiko. And I think that's where you saw some of the initial pop earlier this week, and especially after the election results. Maybe the market was slightly ahead of all of the prognostications with the results of the Senate. I would tip my hat to that.

I do think the conversation over the last 24 hours has been a little bit about any legal challenges, just trying to understand that. I don't think there is an expectation in the investment community that that's going to change much of anything here. And they are certainly looking to see if there is an opportunity for any final result to be a multi-state lead for Joe Biden at the end, even as we await final certification, versus one state, like we had in 2000 that could decide this. But I think the real focus of the market is starting to look more at those Senate runoffs. They don't think that there is going to be a 50-50 Senate, but it is absolutely going to be much more drama and that was anticipated.

ZACK GUZMAN: And Ed, around that drama, I wonder what it does for expectations around that next stimulus bill, should it come through? In terms of the timeline here, obviously that matters. We're going to get into the jobs report in just a second. But in terms of your estimation of where the economy and this recovery sits if that takes longer to get through, how are things going to change there on that front if it takes longer than expected?

ED MILLS: Yeah, so the most important thing that I have heard since the election was the statements out of Senate Majority Leader Mitch McConnell, where he said a another stimulus bill is necessary, and it is his hope to get it done by the end of the year. My hope is that we have removed the question of if and we go back to debating when and how much.

We saw yesterday that Fed Chair Powell continues to push for this fiscal support. That's really extraordinary. This is a Fed that has always avoided giving Congress and the presidency any advice on fiscal matters. For them to say this is needed is a siren call here.

In terms of can we get it done, I'm most watching the December 11 deadline to fund the government. There's a December 31 deadline for unemployment benefits for those who are not eligible or have expired their state-level benefits. Ultimately, we have to see if Donald Trump is willing to work on a deal or sign a deal if he loses the presidency, what negotiating position will Nancy Pelosi take. She certainly will probably want more than Mitch McConnell is offering up. And Mitch McConnell probably doesn't want to have those two Senate seats in Georgia hinge on whether or not there's a stimulus deal.

AKIKO FUJITA: Ed, how does the presidency and the way we have seen President Trump sort of handle these election results complicate those very negotiations you talked about? It does appear as though we're still talking about anywhere from $3 to just over $2 trillion in terms of the package that Republicans and Democrats have put forward. If the president is, in fact, a lame duck at that point, what are the chances that he could say, look, I'm not going to put my signature on it?

ED MILLS: Yeah, that's a significant hurdle. And I do think that when I'm looking at DC, I'm always looking for the crisis. I'm always looking at the deadline. So the government does need to be funded by December 11 or we are in a government shutdown.

I think if we have another temporary government shutdown, the risk of a double-dip recession goes up. That certainly would continue to hurt consumer confidence. So it really comes down to not just a signature on the fiscal relief package, but a signature on keeping the government funded.

Are there some last priorities that President Trump would be pushing for if, in fact he does not win re-election that he would like to see in that? I don't think there's any bet whatsoever that you can guarantee his support will be there. So those are among the real hurdles, Akiko, that I see in getting this done. But the market will continue to focus on the when and how much as a question of if being moved off the table is OK time being for the market.

ZACK GUZMAN: Ed, when we talk about the timeline here, obviously there is that December timeline you're talking about there in funding. But then also, the runoff between those two Senate seats in Georgia you're talking about. It's a difficult question, but if you were to tease out here what more might be weighing on the market here, whether it's the legal battle that Trump appears to be positioning for or the uncertainty over who's going to have control of the Senate, which one, to you, is going to have the larger impact in where the market might go here, because obviously, as we were discussing earlier in the week, it does seem like people are pricing in Republicans maintaining control of the Senate?

ED MILLS: Zack, I think that the real question is, is at the end of the vote count, even if we are going into recounts-- and I looked back at this. There's not been a lot of state-wide results that have changed because of recounts, and those recounts have only changed when it's down to a couple hundred votes. It's not when it's 10,000 votes or more.

And so if there's a multi-state lead for Joe Biden and the margin is above a couple of thousand votes, I think the market will assume that the legal challenges are unlikely to change things, so then the Senate becomes much more important. The caveat to that is that there are some states, Pennsylvania especially, where there is a different party that controls the governorship in the state legislature. So an outside scenario where the market could care is do we have competing sets of electors that kind of end up denying a clear-cut 270 path, but that really only comes down to if it is up to one state tipping it one way or another.

AKIKO FUJITA: Ed, how do you think investors should be looking at the issue of health care? We've got the Supreme Court taking up the Affordable Care Act next week-- yeah, next week. The expectation was that if, in fact, there was a blue wave, Congress would try to override any kind of Supreme Court decision. Now with a divided government, it certainly doesn't look like that would be possible.

ED MILLS: Yeah, so Akiko, the market has declared health care as one of the big winners of this election. The concern heading into this election was a blue wave getting to 53, 54 Democratic senators, the filibuster being eliminated, a big run at a public option, how that was going to play out, a big run at prescription drug changes.

So with a Republican Senate, or even a 50-50 Senate, some of the more concerning issues for health care investors have largely been taken off the table. My colleague Chris Meekins, who is our health care policy analyst, has said that lack of a Democratic majority in the Senate was a total game-changer for health care investors. And we'd expect the risk being off from a policy perspective and a lot of investors re-doubling their attention is starting to overweight that sector, once again.