Stock prices–3068.76 on for the Standard & Poor’s 500 as of 1 p.m. New York time today–continue to climb toward the all-time closing record for the S&P 500 at 3386.15 set on February 19.
That makes some sense if you believe that the Federal Reserve will continue to suppress interest rates–the yield on the 10-year Treasury seems locked in a very, very narrow range of 0.67% to 0.68% that speaks to the Fed’s massive daily intervention in the bond markets–and that corporate profits will rebound strongly in 2021.
2021 is a long way off in the current environment so any forecast that rides on a big recovery in 2021 earnings will have to jump a lot of near-term hurdles that could, at least for the short term, undermine current assumptions.
One of the biggest of those near-term hurdles is the expiration of the big government rescue measures that have propped up consumer spending during the early stages of the coronavirus recession.
In April, for example, actual pay to American workers fell by 7%, but incomes including government payouts under the various coronavirus rescue measures jumped by 10.5%. From April to June the federal government pumped $1.2 trillion into the U.S. economy.
But many of those programs are set to expire beginning this month.
The $1.2 trillion pumped into the U.S. economy from April to June will fall to just $200 billion–“plummet” is more accurate–from July to September, according to Michael Feroli, chief U.S. economist at JP Morgan.
For example, the extra $600 per week in unemployment benefits that Congress passed in March and that now goes to more than 25 million people expires on July 31. So far the $1,200 per individual checks sent to 140 million U.S households remains a one-time payout. The rescue package for small businesses, the Paycheck Protection Program, was designed to help businesses met their payrolls for just eight weeks.
Senator McConnell has said he hopes that the Republican-controlled Senate will move quickly to pass a House bill that would improve and extend the Paycheck Protection Program to 24 rather than 8 weeks. But McConnell also said that he would prefer not to move on other new or replacement stimulus for the economy for at least a month. That would, he says, give Congress time to see the effects of the money spent so far. The House has passed a $3 trillion package of new coronavirus spending and aid.
Waiting too long, however, will guarantee that worries about a plunge in consumer incomes and spending in the July to September period will turn out to be all too justified.
And that would slow down any economic recovery–no matter what the coronavirus or the re-opening of the economy might do.
(In case you’d like something else to fret about a new study from researchers at Harvard has found that government relief programs have missed publicly traded-companies that employ about 8.1 million people, roughly 26% of all jobs at publicly-traded companies. The “miss” is a result of attempts to reduce possible losses to the Federal Reserve, the Treasury, and eventually tax payers by focusing aid on companies with solid balance sheets and avoiding companies that might struggle. These potentially struggling companies are, of course, precisely the companies that might have trouble accessing financing in the public financial markets. The study mentions companies like The Gap Stores (GPS), Dell Technologies, and Kraft Heinz (KHC) as examples of big employers that look to be excluded from existing rescue programs.)