February 24, 2021
If passed, the package means families of four with household income below $150,000 will receive at least $14,000 in federal support in 2021. Hear more from Raymond James Washington Policy Analyst Ed Mills and Institutional Equity Strategist Tavis McCourt, CFA.
A test of universal basic income (UBI) has arrived in the United States. This is a direct result of the pandemic-related relief bills and executive actions of Washington, D.C.
The market and political question will be, “How long will it last?”
With the likely passage of the $1.9 trillion American Rescue Plan, a family of four will receive at least $14,000 in federal support this year, $11,000 of which will be directly deposited into their bank account. This support would be higher for households with children under 6 (+$600 per child), for unemployed workers (+$400 weekly), for individuals with federal student loan debt (automatic forbearance through September) and for households accessing mortgage or rental relief. This support from the federal government is not offset by any tax increases, as it has the goal of stimulating the economy.
We are in the middle of a new fiscal experiment, aimed at targeting support toward the bottom portion of the K-shaped recovery. However, these actions will have long-lasting market and political consequences, and they’ll likely continue to be positive for re-inflation and consumer discretionary equities.
A family of four with household income below $150,000 received a stimulus check for $2,400 in January ($600 per person) and is set to receive another $5,600 ($1,400 per person) following the passage of the current bill. This brings direct stimulus payments to $8,000 for the household.
A new provision has been added that establishes a child tax credit (CTC) of $3,600 for children up to age 6 and $3,000 for children ages 6 to 17. The new tax credit would provide an additional $6,000 to $7,200 per family (versus a $2,000 tax credit per child under the existing code). The new CTC would be paid in monthly installments starting in July, providing a steady flow of direct deposits into household budgets for the second half of this year with the remainder paid during the 2022 tax season.
The current COVID relief bill would increase the federal supplement from $300 to $400 per week, in addition to the state-level benefits received. These benefits are currently set to expire in September, but the Senate is expected to seek an October expiration.
Currently, more than 18 million Americans are collecting unemployment benefits, with benefits varying widely by state and income but averaging $320 per week. The additional $400 per week, if received for a full year, represents an average annualized salary of $37,440. There will be a debate over whether this enhanced federal benefit will reduce incentives for employees to return to work and could either force wage increases or provide cover to the Federal Reserve to continue accommodative policies, should unemployment rates remain elevated.
These benefits have varied over the course of the pandemic, with a weekly benefit under the CARES Act of $600 per week from April through July last year, then an emergency order that provided an additional $300 per week for several weeks in the fall. The new $300 per week restarted in January with a March 14 expiration, which has spurred action by the Biden administration and Congress to push for a relief bill before that date.
Once a benefit has been created through legislation, it is very difficult to reverse. When the CARES Act passed, the toolkit of the federal government expanded. Our expectation remains that the second half of this year will be spent on developing an “infrastructure bill” which could also have a final price tag in the trillions. We think investors should not think of it as a bill for roads and bridges, but rather what “infrastructure” should exist for the future economy. Among the economic infrastructure we expect to be discussed are issues of income inequality, climate change and systemic racism. There will be a greater emphasis to pay for some of these changes through the tax code. This adds considerable complexity to the debate, with significant impacts emerging depending on the contents and success of these efforts.
This unprecedented fiscal support is a bit like recapitalizing the U.S. consumer, so the U.S. consumer will largely be in the best financial position they have been in, on average, for at least 40 years (likely ever). Logically, this increases the chances of a strong recovery as the economy reopens, and increases the chances of inflation, especially in services, initially, as an excess of demand meets limited supply. Ultimately, supply will be increased across the economy and any inflation is likely to be more of a short-lived phenomenon – at least, that appears to be the current consensus among economists.
It's difficult to draw historical analogies for sectors as the economy and index constituencies have changed so much – for example, there were no banks in the S&P 500 until the 1970s due to about 50 years of latent fear following the Great Depression.
What we can say is that the yield curve should steepen, and we suspect asset-rich companies should perform better versus asset-light companies that have dominated equity returns the past 20 years. Broadly, more traditionally cyclical and value sectors should perform better as their EPS growth should be quite strong, on average, while P/E compression is potentially less of a risk. Overall, companies with quick and immediate pricing power will perform much better than companies without pricing power.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.