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Second Stimulus Bill to Propel Growth Next Year

December 28, 2020
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Monday, December 28th, 2020

“Second Stimulus Bill to Propel Growth Next Year” 

It took a bit longer than expected, but we are finally getting the second major round of fiscal stimulus. After a standoff with Congress, President Trump signed the pandemic-aid bill on Sunday night. The full text of the $900 billion stimulus bill came in at nearly 5,600 pages, which begs the question of who actually read it.

As it stands now, Americans will get $600 per adult and per child if their adjusted gross incomes are under $75,000, phasing out up to $99,000 in income. Heads of households who earn up to $112,500 and a couple (or someone whose spouse died in 2020) who make up to $150,000 a year would get twice that amount. There is separate legislation already in the works that could increase the direct payments to $2,000, which was one of the primary criticisms of this bill, especially from President Trump. 

As for unemployment benefits, benefits were again increased through March 14th, this time by $300 extra per week as opposed to the $600/wk. under the CARES Act. The Paycheck Protection Program (PPP) was allotted $285 billion, but includes stricter terms including provisions that show at least a 25% drop in sales from a year earlier in at least one quarter of 2020. An additional $20 billion was earmarked for business in low-income communities and another $15 billion for live venues, including movie theaters.

For many this will be considered too little and/or too late, while others may be fearful of the excessive spending from a government that is already highly indebted. Either way, we do see this as a positive for the economy and the stock market over the next year. Without the CARES Act and this second round of stimulus, there is no question things would look a lot worse for both. 

The Congressional Budget Office (CBO) estimates that the CARES Act helped offset an expected 10% decline in real GDP by nearly half in 2020 and could provide a further 3.1% G.D.P. boost in 20211. If you include the estimated impact from this new stimulus package, it is expected that the output gap inflicted by the pandemic could be offset by 2022.

 

Source: JP Morgan, CBO

That is just the fiscal side as well. Add in extraordinary policy from the Federal Reserve, which makes borrowing cheap and risk assets more attractive vs. risk-free rates, and you can see why the market is looking past the near-term ramifications of the pandemic.

There are repercussions to spending and printing money, namely inflation and weakness in the purchasing power of the dollar; however, it is hard to say that this was not the right thing to do. Although many parts of the economy are still sitting in limbo, there is light at the end of the tunnel. 

Jack Holmes, CFA®

WealthPlan Partners

Source:

  1. https://www.cbo.gov/publication/56597#:~:text=1%20CBO%20estimates%20that%20the,GDP%20by%20about%2058%20cents 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing.  Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. There is also no assurance that any investment strategy will assure success or protect against loss.