The American Rescue Plan has been signed. The questioning has now gone from how large the personal stimulus checks will be to how the checks themselves will impact the economy. “Investors want to know.” Based on how recently the bill was signed, the jury is still out, and it will be a long time before 20/20 hindsight will be available. In the meantime, HCR Wealth Advisors see value in looking at the pros and cons as people watch over their investments and retirement planning.
The stimulus package can be looked at from two perspectives: the micro and the macro. And while there were many aspects to the package besides the stimulus checks (including unemployment insurance supplements, the Paycheck Protection Program, rental assistance, and other direct support), the focus here is on individuals’ direct payments.
The micro perspective
The micro perspective looks close up: at the design of the package and its implementation. It includes who receives the stimulus money and how (or if) it is spent.
Who receives the stimulus checks? – In HCR Wealth Advisors’ experience, the extent to which stimulus checks will affect the economy depends on who receives them. That influences what they will do with the money.
Besides the value of the checks themselves being larger ($1,400 for any eligible individual), this time, “who” receives them also changes. Dependents under 17 received $500 in the first round and $600 in the second. Adult dependents now join the original dependents under 17 in receiving the full $1,400. This will have a marked impact on how much a family receives, as it now includes college-age students and older loved ones being cared for – two categories overlooked in earlier bills.
Targeting continues to consider family income, with caps for individuals, heads of household and couples filing jointly. The payment gradually decreases for those whose adjusted gross incomes exceed those caps.
HCR Wealth Advisors is aware that critics of the stimulus checks question how the checks are targeted, indicating that much of the stimulus goes to people who have not been financially hurt by the pandemic. Those added dollars will not boost economic activity as much as if given to those in greater need.
Among the anecdotes: One semiconductor industry engineer invested his first two checks in stocks and plans to do the same with the third. A retired serial entrepreneur saved the first two checks but will buy new iPhones for himself and his wife now, calling it “found money.” Someone else, who felt she didn’t “earn” it, saved part of the money but increased her donation to food banks. The third check will likely go to spending lavishly on a long-planned vacation when travel opens up.
What will recipients do with the stimulus money? – How Americans spend their stimulus checks has a direct impact on how the economy is affected.
According to the New York Federal Reserve, the $1,200 checks that were part of the March 2020 CARES Act’s $2.2 trillion stimulus package was spent on consumption (29%), savings (36%) and debt repayment (35%). And of the 29% that was spent, the distribution was as follows: necessary living expenses (18%), non-essential hobbies and leisure (8%) and donation (3%). The continued uncertainty about the COVID-19 pandemic was the explanation given for the low spending rate.
But in March 2021, HCR Wealth Advisors saw circumstances as having changed. In the past, despite receiving stimulus checks, enhanced unemployment, and other types of federal aid, many were still confined to their homes.
Now the vaccines are rolling out, having been given to most vulnerable populations and moving down to younger and younger groups. The number of new cases and hospitalizations are dropping, presumably thanks to vaccinations. And states that had remained in lockdown for most of 2020 and early 2021 have started opening.
More than anything, besides an optimism that comes from warmer weather and the declining statistics, the opportunities to spend are multiplying: restaurants, entertainment venues and travel destinations have started to open. Even some of the savings (or room on paid-down credit cards) from past checks could join the effect of the most recent ones.
Economists have different opinions on how much Americans will spend. Chief Economist of Moody’s Analytics, Mark Zandi, feels it will take time to let go of the past year’s lifestyles and spend lavishly, although people will spend. Bank of America/Merrill Lynch’s head of global economic research, Ethan Harris, feels all the deferred spending will drive a massive spending binge.
In either case, they see the rise in consumer spending affecting GDP positively. Zandi says it will add 2% to this year’s economic growth, for a total of 6%. Harris estimates 7% for the year.
The macro perspective
The macro perspective looks at the broader picture: how the stock market, inflation, and debt are affected.
How will the stock market be affected? – What happens to the stock market will depend on far more than just the stimulus checks, although they will play a role. A Deutsche Bank report indicates that 35- to 54-year-old retail investors plan to put 37% of their stimulus money into the market, and 50% of younger investors plan on investing nearly 50%.
But HCR Wealth Advisors believes that stimulus spending can be a valuable indicator of the sectors that could be favored for growth, indicating “recovery” stocks.
According to government data, the May 2020 $1,200 checks were spent mainly on new cars, trucks, furniture, and clothes. People went back to doctors and dentists but spent little on personal care, entertainment, hospitality, travel or leisure. The January 2021 $600 checks were spent on electronics, recreational goods, appliances and takeout food.
And now Americans have a severe case of cabin fever. They are ready to get out of the house and out of town. The sectors best positioned to benefit are hotels, airlines, resorts, and beach towns. Initially, these may be national, at least until international venues become available.
So, even if the economy gets the 6% growth in 2021 that the Fed and many on Wall Street are predicting, growth will be selective.
How much people save can have an impact. The savings from the January checks were helped by bad weather across the country. Today’s savings could be driven by something more political: by positive or negative responses to sweeping changes being promised by the new Administration and passed by Executive Order or Congress.
Beyond the recent $1.9 trillion stimulus package, significant investments in infrastructure, green energy, climate change and other campaign promises can influence investor behavior in general and individual sectors in particular.
What about the impact on debt and inflation? – The sustainability of the U.S. national debt is already a concern of many investors. It was almost $28 trillion at the end of the fourth quarter of 2020, and the American Rescue Plan has added $1.9 trillion more. A $3 trillion infrastructure initiative may be next.
The sustainability of the debt rests on one word: inflation. The cost of servicing that debt while interest rates are not far from zero is very different from the cost if interest rates are forced to rise.
HCR Wealth Advisors sees opinions varying on whether the $1.9 trillion fiscal package will trigger inflation. Moody’s Zandi does not foresee that the estimated 6% of growth in 2021 will run up inflation and cause the Fed to raise interest rates. Bank of America’s Harris thinks his 7% projected growth could lead to a possible surge of inflation by 2023.
Former Treasury Secretary Lawrence Summers has joined Nobel Prize economist Paul Krugman in arguing that the American Rescue Plan goes well beyond what victims of the pandemic needed and could lead to once-in-a-generation inflationary pressures. Nobel Prize economist Joseph Stiglitz thinks Summers is overreacting because the long period of low aggregate demand will allow consumers to spend their stimulus money without overheating the economy.
PCE-based inflation (the Fed’s preferred price gauge) has risen 1.5% over the past year and is moving closer to the average of 2% the Fed has targeted. As the economy opens and consumers start to spend, some economists are concerned it will surpass 2% and start nudging interest rates. Federal Reserve Chairman Jerome Powell says the effect on inflation will be “neither particularly large nor persistent.” Some bond investors are concerned that inflation risks are tilting higher.
So, as HCR Wealth Advisors sees it, the jury is still out.
Part of the assessment that investors must make when considering their portfolios and retirement plans depends on their belief in the Biden Administration. Will the Administration’s expanded role in the economy lead to near- and long-term growth? Or will the debt accumulation resulting from massive infusions of investment – ranging from infrastructure to climate change and domestic manufacturing – depress the possibility?
The U.S. economy – and the world economy – continue to be in uncharted waters. Half the emails landing in investors’ boxes say the world economy is facing cataclysmic losses. The other half says the markets are on the verge of a once-in-a-decade stock run-up.
The best thing to do is reach out to a trusted financial advisor with expertise in the micro and macro forces affecting the markets. That expertise – plus a cool head and a steady hand – are the best tools to making sound investment decisions.
About HCR Wealth Advisors
When we least expect it, something like a pandemic – and its aftermath – comes along and disrupts our relatively settled plan. At HCR Wealth Advisors, they prepare for the unexpected and maintain composure in even the most stressful situations, ensuring their clients a clear path to the next stage of their journey.
This article is provided for informational purposes only and should not be interpreted as investment advice. HCR Wealth Advisors is not affiliated with this site.