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  • All three major indices opened at record highs before seeing relatively mild selling pressure.
  • The Senate will vote on a bill to increase the size stimulus cheque to $2000 later in the week.

The S&P 500 (-0.22%), Dow Jones Industrial Average (-0.21%) and Nasdaq Composite (-0.41%) indices all closed in the red, after all three pulled back from record-high opens. The S&P 500 dropped back from highs set shortly after the open at 3756.1 to close below 3730, with the index seemingly supported at the old all-time set back on 18 December at 3726.7.

Meanwhile, the Nasdaq Composite pulled back from 12973.3 highs to close just above 12850, with 12840 support (the all-time highs set this time last week) keeping a floor under the price action for a second day running. Nasdaq bulls seem to have 13000 in their sights before 2020 is out. Finally, the Dow came within a whisker of the 30600 mark in early trade before sliding into the red and remained supported above 30300.

In terms of the sector breakdown, Healthcare and Consumer Discretionary stocks managed to eke out modest gains, while Real Estate, Industrials and Energy led the declines.

Most notably, small-cap stocks took a beating on Tuesday, with the Russell 2K shedding 2.2%. No specific news drove the decline and some analysts are chalking it up to pre-year end position re-adjustment following the Russel 2K stunning rally thus far on the month (the index was up more than 11% on the month at highs, before dropping to close the day a with more reasonable monthly gains of roughly 7.5%).

While year-end rebalancing is likely to continue to distort the price action for the remainder of the week, focus will also continue to be on US fiscal stimulus and the coming Senate election in Georgia.

Senate weighs juiced up stimulus payments

One factor on the mind of markets on Tuesday is US fiscal stimulus. US President Donald Trump’s decision to sign the originally agreed-upon $900B package, which includes a $600 direct payment to each American, has sent US equities to record highs this week and is baked into valuations now.

But equity markets are hoping for further pumping; the House yesterday voted in favour of increasing the stimulus cheques to $2000 from $600 (as demanded by President Trump) and eyes are now on whether or not the Senate will do the same. The House voted in favour of the stimulus by unanimous consent, but Senate Majority Leader Mitch McConnell ruled out the possibility of unanimous consent in the Senate on Tuesday. But the Senate will still vote on the bill later in the week.

Senate Republicans will be feeling the pressure to vote in favour of juiced up stimulus payments give the proximity of the all-important Senate run-off election in Georgia; the Democrats are currently in the lead in the polls and need to win both of the two seats up for grabs to command a majority in the Senate. If they do manage to pull off a victory, which seems increasingly likely, that would hand then control over Congress to go alongside their control over the White House. Expect additional fiscal stimulus in 2021 to the tune of trillions. Given how much this market likes stimulus (monetary or fiscal), a Democrat victory here would likely be a positive for stocks and further pump valuations.