In this article we review:
- Composition of the new $1.9 trillion COVID-19 Stimulus Package
- How this fiscal stimulus could impact economic growth in the year ahead
- Effects this economic stimulus package could have on long-term interest rates and inflation
- How investors should gauge the impact of this stimulus in accordance with other market dynamics
On March 11, President Biden signed into law the American Rescue Plan Act of 2021, also known as the COVID-19 Stimulus Package, encompassing $1.9 trillion of fiscal stimulus with wide ranging financial relief spread across a wide variety of recipients. Passed by Congress along partisan lines, this stimulus has been expected since January, yet we believe further market reaction is likely to follow.
As described by its supporters, the American Rescue Plan seeks to combine efforts to mitigate the economic impacts of COVID-19 with health-based strategies to directly combat the virus itself. While there was strong debate and disagreement within Congress as to whether the total cost of nearly $2 trillion was necessary to accomplish these objectives, given recently improving economic reports, the legislation has now been signed into law and markets will continue to process the impacts of these large dollar amounts and where they are headed.
Major components of the legislation include:
Over $400 billion will be sent to individuals and families. This will come in the form of $1,400 direct payments to individuals earning $80,000 or less annually and couples earning $160,000 or less. It is expected these payments will be mostly used by those receiving them within a short time frame.
State and local governments will receive financial aid of $350 billion. This assistance will be made to state, city and tribal governments, as well as those of U.S. territories. This segment of the package is designed to help replace lost tax revenues for these governments since the pandemic began.
About $290 billion will be allocated to extending unemployment insurance benefits for displaced workers impacted by the virus. Pandemic Unemployment Assistance of $300 weekly, originally passed under last year’s CARES Act, will now be extended into September 2021, and the total period of eligibility for such benefits has increased from 50 to 79 weeks. In addition, the first $10,200 received under such assistance will now be exempt from federal taxes.
Approximately $270 billion has been designated for a combination of transportation, infrastructure, education, and labor. From a transportation perspective, this will include spending on mass transit, airports, aerospace, and Amtrak. Kindergarten through high school facilities will receive upwards of $130 billion, with colleges and child care receiving approximately $40 billion each.
Approximately $120 billion is being allotted directly to the pandemic response itself. This includes federal spending as well as assistance to states regarding vaccine distribution, COVID-19 testing, contact tracing, and increasing the workforce of healthcare experts administering these efforts.
Small business assistance will account for about $50 billion. This will mostly be focused on restaurants and bars, which have suffered badly from the pandemic, as well as the Economic Injury Disaster Loan Advance program and additional funding pertaining to the Paycheck Protection Program.
Remaining areas include expanding tax credits and providing targeted assistance. This will include expanding the Child Care and Earned Income Tax Credits, as well as additional assistance to Veterans Affairs, agriculture programs, and emergency relief to struggling multi-employer pension plans.
It is important to recognize that the size of this economic stimulus package, while not of any recent surprise, is still considerably larger than anticipated before early January, when Democrats gained a Senate majority via the two Georgia runoff elections. Prior to that development, consensus expectations had been for a stimulus package somewhere in the $1 trillion range. Now with almost twice that amount being disseminated into the economy, representing approximately 9% of aggregate annualized pre-virus 2019 gross domestic product (GDP), this fiscal stimulus package has already played a role in various economic and market expectations and will likely continue to do so. These include:
Strengthening economic forecasts. With the Atlanta Fed currently tracking 1Q annualized GDP growth at better than 8%, expectations of the remaining three quarters inclusive of this additional fiscal stimulus have now pushed most forecasts to about the 7% range for CY 2021. These revised GDP estimates are materially higher than where they stood at the year’s outset and, if accomplished, would represent more than a complete recovery from last year’s COVID-19-induced recession by year’s end.
Improving corporate earnings estimates. Following an 11% decline in CY 2020 corporate earnings (as measured by operating earnings of underlying S&P 500® companies), CY 2021 estimates (as gathered by Factset Earnings Insight) are now projecting approximately 25% annualized growth. If achieved, this would reflect about 10% growth from pre-virus 2019 S&P 500 operating earnings, also signifying better than a complete recovery since the pandemic began. We believe there could still be some upside to current 2021 earnings estimates based in part on implementation of the new fiscal stimulus.
Total stimulus numbers are now reaching staggering levels. It is also worth noting that the $1.9 trillion being applied from the American Rescue Plan caps a year of fiscal and monetary stimulus unparalleled in history. Since the outbreak of the COVID-19 pandemic, we have seen the implementation of the CARES Act of last March ($2.7 trillion) and the Consolidated Appropriations Act of last December ($900 billion), which when combined with the American Rescue Plan now totals more than $5.5 trillion in fiscal economic stimulus. When adding in the monetary stimulus as shown in the Federal Reserve’s historic balance sheet expansion of approximately $3.5 trillion over the past year, total stimulus programs since the pandemic began are now approaching $9 trillion. Clearly the economy will need to experience ongoing growth beyond 2021 to ultimately compensate for the financing of these immense numbers.
Rising long-term interest rates. With rising economic and earnings forecasts, which have in many cases been upgraded to some degree based on the additional $1.9 trillion of stimulus, long-term interest rates have seen a substantial increase. This has been displayed in the 10-year Treasury yield, which closed on March 12 at 1.64%, up from .93% when the year began and .52% from last August’s record closing low. These higher rates have created some market concerns in recent weeks.
Renewed concerns of inflation. The additional economic stimulus soon to be distributed throughout the economy has also helped fuel new worries of rising inflation, a market concern not experienced in more than a decade. As the economy further heats up and more dollars potentially chase the same amount of goods and services, some fears are now being expressed we could see inflation rise above the Federal Reserve’s long-term target of 2% in the upcoming year. (For more detail on inflation concerns please see our previous article — March Begins with Market Battle: Stronger Growth vs. Higher Interest Rates).
In summary, we believe investors should view this soon-to-be-implemented $1.9 trillion of economic stimulus within the context of several other market dynamics, but ultimately as a net favorable development for equity and credit markets. In addition to the relief desperately needed by individuals, families, and small businesses, this stimulus will likely ensure the U.S. economy surpasses a complete recovery in aggregate GDP and corporate earnings by the end of 2021. Investors will of course need to net this potential economic and earnings growth against higher long-term interest rates and the prospect of modestly rising inflation in the year ahead. However, when taking all factors into account, we believe markets are likely to continue favoring this higher-growth environment we see playing out in the year ahead.
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