The Dow Rose 338 Points Because Republicans and Democrats Are Coming to Terms on Stimulus

Stocks rose sharply as investors react to signs they can now reasonably expect a fiscal-stimulus bill to be passed sooner rather than later.

The Dow Jones Industrial Average rose 338 points, or 1.1%, to close the day at 30,199. The S&P 500 and the Nasdaq Composite both rallied 1.3%, lifted in part by gains for Apple (ticker: AAPL).

The tech giant, with a market capitalization of $2.16 trillion, rose 5%. According to reports, Apple now plans to produce 96 million iPhones in 2021 for a 30% year-over-year increase. And consensus estimates call for Apple to sell 215 million iPhones in 2021, for revenue of $165 billion, though those estimates could soon be revised upward.

The revenue figure would amount to an increase of 20% year over year as smartphone demand continues to emerge from a slump caused by the pandemic. “iPhone 12 supercycle [is] underway; so far reality is meeting the initial hype,” wrote Wedbush Securities analyst Dan Ives in a note.

Another big gainer in the S&P 500 was Wynn Resorts (WYNN), up 6.1%.

Still, the rally Tuesday was broad. Many economically sensitive sectors rallied on the latest news about a government spending plan.

Congress has been squabbling over aid for state and local governments, which Democrats favor, and protection for small businesses from virus-related lawsuits, backed by Republicans. On Monday, lawmakers unveiled a $748 billion bipartisan bill that would exclude both elements. It would grant federal unemployment benefits to households, while small businesses would see more loans.

A separate $160 billion bill, would include funding for state and local governments, as well as the controversial liability protection. The total expenditure of $908 billion would support small businesses until Covid-19 vaccines are widely distributed.

This “gives the market hope that policy makers are going to come to the table and build this bridge,” Jeff Mills, chief investment officer at Bryn Mawr Trust Wealth Management, told Barron’s.

Strategists at Evercore had said that expectations of fiscal stimulus were being priced into the market in November, when surveys of their clients showed that investors were increasingly confident. But between Dec. 4 and Tuesday, the S&P 500 fell almost 1%.

Now, the chance for more stimulus during the lame-duck presidential term look brighter. Mills said that investors are now likely pricing in the probability of stimulus passing in December.

“When you get news around fiscal stimulus, really the more dramatic moves are what you’re seeing below the surface,” he said. “It’s not even just at the overall index level.”

Oil stocks—highly sensitive to shifts in the economic cycle—raced higher. The Energy Select Sector SPDR Fund (XLE) rose 2%. Bank stocks rose as well as yields on Treasury debt inched higher, an indication of mounting expectations for economic growth and inflation. Higher long-term interest rates boost bank profitability; the SPDR S&P Bank ETF (KBE) rose 2%.

Manufacturers had a particularly strong day as upbeat economic data rolled in. Caterpillar (CAT) rose 2%, while United States Steel (X) rose 4%. Industrial production for November rose 0.4%, beating estimates of 0.2%, but decelerating from the prior reading of 0.9%.

Investors have been expecting softness in economic data given rising Covid-19 case counts, but “another solid increase in industrial production in November reaffirms that activity broadly has not slowed too substantially despite new activity restrictions as a result of rising virus cases,” wrote Citigroup economists in a note.

Industrial stocks have outperformed the broader U.S. market in the past few months, and the gains could continue.

“U.S. industrials have room to catch up to better business sentiment,” wrote Solita Marcelli, head of the UBS’ Americas chief investment office in a note. A graph in her report showed that industrials’ share-price performance is tightly correlated with increases in new orders. But since March, industrial stocks have followed the rise in new orders far less closely than they usually do.

On a near-term basis, stocks look overextended to many market observers, which partially explains the weakness in the past few weeks. “Expect [a] tactical near-term correction,” wrote Tony Dwyer, chief market strategist at Canaccord Genuity, in a note. He noted that 76% of S&P 500 stocks are trading above their 50-day moving averages, one sign of an “extreme overbought” condition. Dwyer recommends buying any dips.

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