Valuentum Exclusive Analysis for the Discerning Investor

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Image Shown: The Trump Administration is reportedly considering pushing for fiscal stimulus to offset the likely slowdown in US economic activity during the first half of 2020, which is arguably why equity markets are looking to rebound on Tuesday, March 10, after a harrowing trading session on Monday, March 9.

By Callum Turcan

US equity markets (SPY) started up strongly initially on Tuesday, March 10, likely due to reports coming out that the Trump Administration was considering recommending payroll tax cuts, paid leave, and special loans to small businesses to offset the negative impacts of the novel coronavirus (‘COVID-19’) epidemic. There are over 560 reported cases of COVID-19 in the US as of this writing, and unfortunately, that includes roughly two dozen fatalities. This is a serious epidemic and we hope everyone and their loved ones stay safe during this crisis.

As it relates to the US economy, a payroll tax cut does give additional take home pay to those with the highest marginal propensity to consume (‘MPC’). During the Great Financial Crisis (‘GFC’), the Obama Administration implemented a payroll tax cut in 2011 and 2012 that reduced the employees side of the payroll tax by ~200 basis points, so there’s some precedent for such a move but keep in mind that was at a time when the US economy was emerging from a massive recession. As of early-2020, the US economy continued to chug along with record low official unemployment rates and modest wage growth.

As of February 2020, the official unemployment rate stood at 3.5% and annual wage growth stood at 3.0% while core inflation (defined here as the personal consumption expenditures (‘PCE’) price index, excluding food and energy) stood at 1.6% in January 2020. Depending on what measure of inflation one uses, the headline US inflation rate is roughly 2% (+/- 50 basis points); however, those with a different expenditure profile (i.e. large healthcare, childcare, or education expenses) are likely to experience different levels of expense growth than what an adjusted national figure indicates.

Implementing a massive payroll tax cut stimulus now would very likely exacerbate the US budget deficit, which the Congressional Budget Office (‘CBO’) estimates will come in at $1.0 trillion in fiscal 2020 (the CBO’s forecasts call for $4.6 trillion in outlays less $3.6 trillion in inlays). Payroll taxes represented ~35% of the federal US government’s revenues in fiscal 2018, according to the Center on Budget and Policy Priorities. Furthermore, even though a short-term payroll tax cut would benefit those (on a temporary basis) with the highest MPC in the US, it isn’t clear if those consumers would actually spend significantly more given the ongoing COVID-19 epidemic is keeping many households indoors.

While there could be upside via e-commerce, digital purchases, etc., that might not be enough of a boost to offset the negative effects from an epidemic as it relates to economic activity and overall consumer/business confidence in the short- to medium-term. Higher savings rates by households via a reduced payroll tax rate and greater take home earnings has its benefits, but that comes at the expense of a significantly larger US federal budget deficit.

Turning now to the other potential proposals by the Trump Administration, as reported by the WSJ, the paid leave for hourly workers and special loans for small businesses could offer some upside on the margin (depending on the size and scope of these programs). Allowing for hourly workers to continue receiving a paycheck maintains the spending power (to some degree) of the relevant households, and for small businesses, helping mitigate liquidity/cash flow issues via special loans and possibly other considerations could offset potential layoffs and maintain spending power for the relevant households.

Whether any of these programs/packages come to fruition is a different story, as they would need to be appropriated and approved by Congress first and that’s no given. We will continue to monitor this situation as it unfolds, and will continue to provide commentary on these key events for our members.

Related: SPY

Tickerized for holdings in the DIA.

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Callum Turcan does not own shares in any of the securities mentioned above. SPY put options with a June 30, 2020 expiration date and a $250 strike price are included in both Valuentum’s simulated Best Ideas Newsletter and Dividend Growth Newsletter portfolios. Some of the companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.