Stimulus Hopes Are Fading. Here’s What Will Happen If It’s Not Passed Soon
What if told you Americans are much better off (financially) during Covid?
You’d probably call me nuts. But here’s the truth: many Americans are now earning more than ever.
And I’m not talking about Wall Street suits who made fortunes in the historic stock rebound. Or tech whizzes who run internet companies from their kitchen tables.
I’m talking about service workers— waiters, sales clerks, janitors, and all—who were dealt the heaviest blow. It’s counterintuitive, but some of them are now earning nearly twice as much as they did before Covid hit.
No wonder the economy has, so far, been holding up pretty well. But if politicians don’t hurry up and pass another stimulus bill, we might see a 180 degree turn of events.
America is still battling the worst unemployment since the 1930s
Covid is the single largest economic crisis since the world wars. Things are looking slightly up today, but we are still far, far from the BC (before Covid) standard of life.
The official data says 8.6% of Americans are out of work. But economists found a couple of “misclassification” errors that had skewed this figure. According to CNBC, they think the real unemployment sits north of 11%.
That’s still the worst unemployment since the Great Depression. For a more relatable perspective, there are nearly 2X more people out of work than there were during the heat of the housing collapse in 2008.
And yet, the economy appears to be doing just fine—thanks to generous Uncle Sam.
The stimulus bill topped up Americans’ income to record highs
In April, Trump signed off on a record $2.2 trillion stimulus bill called the CARES Act. Under the bill, Uncle Sam has handed out $350 billion in extra benefits to support Americans who’d lost their jobs.
Normally, unemployment insurance covers less than half of a person’s wages. But the Cares Act checks stacked up to much, much more than that.
Look at this chart that shows how the stimulus topped up the pockets of out-of-work Americans:
The National Bureau of Economic Research estimated that two-thirds of unemployed Americans were getting benefits greater than their lost earnings. And get this, 1 in 5 were eligible for welfare benefits that were at least 2X their previous salary.
The result: in April, at the height of the Covid crisis, Americans’ income surged 14% compared to a year ago:
That’s the largest monthly jump on record—and it happened during one of history’s greatest economic crises.
In all, Americans are now making on average 8.2% more than they were a year ago. And a lot of them are spending more.
The stimulus propped up spending, but the money has run out
Spending is key here. Because 70% of the American economy runs on personal consumption. In other words, if Americans stop spending, the economy will stall like a plane that’s run out of gas.
Now, take a look at this chart. It shows how Covid pulled down spending and how it quickly bounced back after the Cares Act bill:
Over the summer, spending almost returned to pre-Covid levels. Meanwhile, lower-income Americans opened up their wallets even more compared to a year ago.
But the most thriftless were the unemployed. A recent JPMorgan JPM study found that out-of-work Americans were splashing out 10% more than they were before Covid.
This spending-spree surely helped prop up the Covid-hit economy. But here’s the problem: benefits are expiring at this very moment (literally). Half the states have run out of unemployment money. Others are about to give out.
If extra benefits don’t get passed soon, a lot of Americans will have to tighten their belts to the last notch. And that’s keeping Wall Street up at night.
Here’s the main takeaway for investors
Keep a close watch on stimulus talks and progress in the coming days. As Covid begins to pick up again, stimulus will determine where the economy (and the stock market) is headed.
It may also be a good idea to allocate part of your portfolio to stocks that are immune to a drop in spending. To pick your roster, ask yourself a couple of questions:
- What will people buy no matter what (consumer staples), and where?
- What will people substitute or defer (consumer discretionary)?
But also look beyond the traditional labels of “consumer staples” and “consumer discretionary.” Because we now live in a world that’s not a norm by any standards those labels were built on.
For example, is a Netflix NFLX subscription a necessity? What about a game console? Typically, you would say no. And you won’t find a single gaming or TV subscription stock that goes under the “consumer staples” label. Yet….
Most people would be bored to death holed up at home without TV—or some form of entertainment. No surprise, gaming and TV subscription sales hit record highs during Covid.
If Uncle Sam stops indulging Americans with generous checks, answers to these questions will seal the fate of your portfolio.
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This is not investment advice.