The Dow Fell 149 Points Because Fiscal Stimulus Is Already Getting Priced In

Stocks fell on Monday even as additional fiscal stimulus this year is getting closer to reality than fantasy.

The Dow Jones Industrial Average fell 148.47 points, or 0.49% to close at 30069. The S&P 500 fell 7.16 points, or 0.19% to close at 3,691. The Nasdaq Composite rose 55.71 points, or 0.45% to close at 12,519. The biggest gainer on the S&P 500 was MarketAxess Holdings (MKTX), up 5.7%.

Sen. Mark Warner told CNN on Sunday that a fiscal-stimulus bill was moving closer to getting done. There was no news on that front on Monday.

Since Nov. 20, when the rally in stocks took a brief pause, the S&P 500 is up 3.6%. Since that date, according to some on Wall Street, investors have become more optimistic that a stimulus deal will be approved this year. The bipartisan bill is for $908 billion, with money earmarked for small businesses and struggling households.

Still, stocks were down. In fact, the S&P 500 could have fallen more if not for big tech stocks. Apple (AAPL) and Facebook (FB) rose 1.2% and 2%, respectively. Big tech valuations have come down meaningfully and the group of companies have “rock solid balance sheets, hyper revenue growth and the ability to buy back stock,” Trip Miller, founder of Gullane Capital Partners, said in an interview.

David Miller, chief investment officer at Catalyst Capital Advisors said, “If you can think about something that can compound at 20% annualized [earnings] and do that for a decade, it really kind of changes the math on how you’re trying to do things. These things are just really significant long-term trends.” He said that, barring regulation, “it’s hard to imagine” other businesses competing with the heavy hitters in big tech.

Value stocks, or those more tied to changes in the economy and often those that investors avoid when favoring stocks that perform well when the pandemic remains a headwind, fell harshly. Oil had a rough go of it, with the Energy Select Sector SPDR ETF (XLE) down 2.4%. Industrials were down, with Caterpillar (CAT) falling 1.9%.

These stocks would benefit with more fiscal spending.

“A little bit of it is just sell the news,” on stimulus, Miller said. “A lot of this has been priced in to some degree.” Daily Covid-19 cases have surged of late, but the market has recently pushed through that because of fiscal stimulus. With the recent run-up in stocks, valuations are getting stretched. With the average forward earnings multiple on the S&P 500 at a touch above 22 times, the equity risk premium—the excess rate of return expected on stocks for the next year over the 10-year Treasury yield—is at around 3.5%. Historically, that risk premium tends to sit at roughly 3.5% and often doesn’t fall much further. A lower premium usually means higher stock prices.

“We’re having a hard time finding [stocks],” said Trip Miller at Gullane Capital. “When we’re don’t find things, our discipline is to hold cash.”

Importantly, the move in markets on Monday was still relatively muted. “It’s just not that big of a move,” David Miller said.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com