Where We Stand On This Coronavirus Stimulus Bill
Over the last 24 hours we learned that Senate Majority Leader Mitch McConnell is “farther away” from a coronavirus stimulus bill than the market was hoping at the start of the week.
“I think the Republicans and Democrats will get closer together. It’s a mistake to leave folks without everything, especially before the election,” says Vladimir Signorelli, head of Bretton Woods Research. “If we don’t get it, then I think you’d just see some Executive Order action. Let the Democrats play the Grinch on that. The most important thing for me is that the 10-year Treasury yield is moving higher and that means the growth outlook is looking better, for the most part.”
Where does this thing stand?
Treasury Secretary Mnuchin offered a $1.62 trillion in fiscal relief to House Speaker Nancy Pelosi, according to a press report by Roll Call. This is now lower than the $2.2 trillion offered earlier this week by House Democrats, but still within the price range.
Mnuchin has reportedly based this deal off of the proposal of the “Problem Solvers Caucus,” but unlike their proposal, Mnuchin is not offering an automatic trigger for additional aid in 2021, should certain negative economic indicators persist.
Based on a report by Raymond James RJF public policy analyst Ed Mills, the main provisions of Mnuchin’s offer are:
● $250 billion in state and local funding;
● $160 billion in Payroll Protection Plan funding (second round of forgivable loans for hardest hit businesses);
● $120 billion for airlines, restaurants, lodging, and entertainment venues;
● $1,200 per individual/$500 per dependent stimulus check;
● $400 per week in enhanced unemployment (9/12-1/1);
● $175 billion for healthcare, including $50 billion for vaccine production/$50 billion for providers;
● $150 billion for schools;
● $60 billion mortgage relief;
● $28 billion student loan relief and;
● $10-15 billion for the U.S. Postal Service, which is expected to be the bogeyman of Election 2020 if ballots get lost in the mail.
“Overall, we would view sticking points over the amount of the unemployment benefits and the state and local funding,” says Mills. Democrats decreased their funding for state and local governments from about $1 trillion to $436 in their most recent bill. The latest House draft this week included multiple policy-related items and those items will likely also be a sticking point.
For Mills, the argument the Trump Administration striking a deal with the House is that many service sector businesses and individuals now getting laid off again due to new restrictions in California and the threat of more in New York City will need this aid.
An incumbent president’s reelection chances are usually always tied to the economy, but with layoffs looming in travel and tourism, restaurants and other service sector businesses, stimulus failure is bad for Trump. This makes the executive order the backstop.
“Trump has already taken executive action to show he is willing to bypass Congress,” says Mills.
Mnuchin and Pelosi are like Trump, they are both deal makers.
Democrats have long wanted additional funding for their favorite states, but even in a Democrat sweep of Congress it could be as late as March before a deal is even inked if they wanted until after the election. That puts us almost one year after the passage of the CARES Act, the first coronavirus stimulus bill.
Timing is everything.
Wall Street wants to know if there is a deal or no deal. Some were hoping for answer on Wednesday. Instead, they got the opposite of what they were hoping for with McConnell saying no deal.
Although timing this thing is about as easy as timing the market, something needs to come together quickly or Democrats will just vote on their $2.2 trillion package and go home for the election. Then Trump will put in an EO anyway.
“If a deal comes together, we would see it fairly quickly pass the House. The Senate will be in session related to the Supreme Court vacancy, and we would expect some Republicans to balk at the price tag. There would be speculation the Senate will not act, but we think if a Mnuchin/Pelosi deal is struck, odds of Senate passage would be high,” says Mills.
UBS thinks that the Supreme Court vacancy could also be a sticking point for stimulus.
Any hearings on new justice Amy Coney Barrett is likely to increase political drama that puts stimulus on the backburner. “Tensions will not subside ahead of the election,” says Mark Haefele, chief investment strategist for UBS. He thinks those chances reduce the odds of new stimulus be Election Day.
How should investors ride these choppy waves?
Haefele says he expects equities to move higher over the medium term, thanks to the likely development of a successful vaccine that ebbs fears of more lockdowns and restrictions.
Stimulus, even in the form of an EO, is also a long equity move, not to mention the obvious: continued extraordinary global monetary support by central banks.
Despite stimulus and the Feds, the path to a “more normal” market and daily life is likely to be volatile due to differences of opinion on how to best fight the ongoing coronavirus contagion, election stress, and continued China tensions.
Stimulus will be pinpointed, and some sectors will see big gains though investors would be wise to double check whether or not the big investors have already pushed those stocks up to post-stimulus levels.
Southwest Airlines LUV is up 11% over the last three months, beating the S&P 500. American Airlines AAL is down 3.7%. Hilton International is up nearly 19%.
“We recommend investors take advantage of the volatility to build long-term positions,” Haefele says.