Image Source: Frank Boston

By Callum Turcan

A lot has changed in a short period of time since we published our first note covering the potential for a major US fiscal stimulus program back on March 10 (link here). Due to the sheer amount of pummeling the stock and credit markets have taken over the past few weeks, along with consumer, business, and investor confidence at-large (we’ll get a better read on that over time), it seems that both Democrats and Republicans are now more open to a major fiscal stimulus program than before. The ‘Survey of Consumers’ conducted by the University of Michigan notes the ‘Index of Consumer Sentiment’ fell from 101.0 in February 2020 down to 95.9 in March 2020, and there’s room for that index to fall a lot further. Please note the next data release date is March 27.

In all likelihood, this is all due to the negative impacts posed by the ongoing novel coronavirus (‘COVID-19’) pandemic to both the health of individuals (particularly the older demographics and those with preexisting conditions) and the health of the overall economy (due to the “cocooning” of households and consumers). We sincerely hope everyone, their loved ones, and their families stay safe out there as we get through this pandemic as a nation and as a global community.

Fiscal Stimulus Now Seriously Considered

There are now reports coming out that the Trump Administration is considering a massive fiscal stimulus program, with the WSJ reporting the proposal could come in at $1 trillion, which includes a $250 billion cash injection to US households in the form of a direct payment system. That could involve giving $1,000 to every US adult, under a proposal put forth by Senator Romney (Republican, Utah), which seems to include every US adult regardless of income status. Reportedly, there’s another program floating out there that would give $2,000 to every US adult and child under a proposal backed by Senators Booker (Democrat, New Jersey), Bennet (D, Colorado), and Brown (D, Ohio); however, that program reportedly would be for those under a certain income threshold.

Treasury Secretary Mnuchin laid out the program for Senate Republicans on Tuesday, March 17, which also included (according to the WSJ) a $50 billion bailout to the US airline industry, and a large payroll tax cut. Other proposals include refundable tax credits for those hit the hardest, a more expansive paid leave program (which is being covered in part through a bill that’s already working its way through Congress, but that could potentially be expanded further), further assistance to smaller businesses, delaying the federal tax filing deadline by roughly three months, additional funding for the healthcare system, additional unemployment insurance funding, deferring certain types of loan payments where possible (such as deferring the interest payments on student loans), general stimulus packages (possibly greater infrastructure spending, etc.) and more.

Additionally, please note Senator Schumer (D, New York) has put forth a $750 billion fiscal stimulus bill that would both deal with COVID-19 and the US economy. This builds on the $8.3 billion emergency bill signed into law earlier this month by President Trump, and another bill currently working its way through Congress (which includes covering the costs of getting tested for COVID-19, paid emergency/medical/family/sick leave, and other considerations, but isn’t nearly as large as the proposed fiscal stimulus bills covered in this article).

Here’s an excerpt from our first note covering this ongoing event that’s still very relevant today:

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 [that’s likely changed materially since February 2020, but still worth keeping in mind].

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.

With the above in mind, now that a direct cash payment to US households is also being considered, that could potentially increase the possibility that a bipartisan accord could be struck between Democrats and Republicans. A complete reduction in the payroll tax cut may not be in the works, but a modest reduction could become possible as part of a bigger agreement. There have also been reports that any such US fiscal stimulus program could quickly balloon north of $1 trillion. We ponder the long-term implications of growing fiscal deficits, a larger sovereign debt load, and whether such fiscal stimulus in the near term portends a reversion to higher corporate tax rates in subsequent administrations, a distinct long-term negative to equity values.  

Concluding Thoughts

As always, we will continue to keep our members informed of any key updates and events going forward as new information comes in. Fiscal stimulus measures won’t immediately solve the COVID-19 pandemic (increased healthcare investments will help of course) but can be a way to pump more funds into the strained healthcare system and more cash into the hands of households and ultimately consumers during these harrowing times, while also helping out businesses large and small. If such an event were to arise, while there are serious implications as it relates to long-term corporate tax policy and the long-term health of the US federal government’s finances, it would likely behoove US equity markets in the near-to-medium-term.

Related: SPY, JETS

Tickerized for holdings in the DIA.

Related airline equities: AAL, ALK, DAL, HA, JBLU, LUV, SAVE, UAL

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Callum Turcan does not own shares in any of the securities mentioned above. 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.