“Inside you is the potential to make yourself better; and that is what it is to be human. To make yourself more than you are.” ~ Captain Jean-Luc Picard, Fictional Character and Captain of the USS Starship Enterprise
Question: Would you discuss the details of the proposed $1.9 trillion American Rescue Plan?
Answer: If passed, the proposed package outlines that a family of four with reported household income below $150,000 will receive at least $14,000 in federal support in 2021. In essence, this is a trial for universal basic income (UBI) in the United States. This is a direct result of the pandemic-related relief bills and executive actions of Washington, D.C. Financial markets, politicians, and citizens will be wondering how long this will last.
With the expected passage of the $1.9 trillion American Rescue Plan, a family of four will receive a minimum of $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 six (an additional $600 per child), for unemployed workers (an additional $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 one of the goals is to stimulate the economy, and ultimately create stronger economic activity, thereby producing opportunities for increases in taxable events.
This fiscal experiment targets support toward the bottom portion of the K-shaped recovery. These actions will have long-lasting market and political consequences, and they’ll likely continue to be positive influences 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 six and $3,000 for children ages six 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.
A cliff ahead or new normal?
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.
What does this mean for the market?
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.
What does this mean for sectors?
It’s difficult to draw historical analogies for sectors because 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 underlying fear following the Great Depression.
It is expected that the interest rate 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 earnings per share (EPS) growth should be quite strong, on average, while price-to-earnings (P/E) ratio compression is potentially less of a risk. Overall, companies with quick and immediate pricing power will perform much better than companies without pricing power. Quality and balance sheet strength matters. Stay focused and invest accordingly.
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. There is no assurance that any investment strategy will be successful. The opinions expressed are those of the writer as of March 1, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance does not guarantee future results. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
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This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email firstname.lastname@example.org Website: www.raymondjames.com/Darcie.