by Bryan Perry

July 21, 2020

Congress returns to Capitol Hill this week to hash out another bailout package as the $600 per week unemployment checks run out at the end of July. The momentum to pass a bill in the next 10 days is politically huge for both parties and while there are a variety of differences in how the bill is structured, there is bipartisan support to match or exceed the $2.2 trillion stimulus bill Congress passed in March.

The likelihood of an extension of the federal unemployment assistance checks is high, but the weekly total may be reduced from the $600 level to incentivize recipients to look for work. In the $3.5 trillion stimulus bill that was passed in May, Democrats proposed another round of one-time checks to families that will likely be part of this bill, since it has the support of Treasury Secretary Steve Mnuchin.

Some argue that COVID-19 has taken a 20% share of GDP in the U.S. Once the second-quarter earnings season is in the books, we’ll have a more accurate read on the impact of the shutdown on the economy.

Covid-19 Fiscal Stimulus Packages Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It is also probable that the Payroll Protection Program (PPP) will be expanded and extended for small businesses, allowing them to take out a second loan, coupled with an aggressive forgiveness program, turning these loans under $150,000 into grants as the economy faces a second wave of widespread pandemic-related shutdowns. The Small Business Administration (SBA) says this forgiveness program would account for 86% of the 4.9 million PPP loans issued to date, or 27% of the $520 billion lent.

Then there is the Federal Reserve, having taken on the role of Atlas, deploying a broad array of actions to limit the economic damage from the pandemic, including up to an initial $2.3 trillion in lending to support households, employers, financial markets, and state and local governments. That was back in late March.

On June 10, the Fed said it would buy at least $80 billion a month in Treasuries and $40 billion in residential and commercial mortgage-backed securities – until further notice. Between mid-March and mid-June, the Fed’s portfolio of securities held outright grew from $3.9 trillion to $6.1 trillion.

Federal Reserve Chairman Jerome Powell has fashioned his own super-sized version of the Fed “put,” which catapulted the stock market off its 2009 low and helped lead to the longest economic expansion on record for the U.S. economy. And while these current efforts are well intended, they are corrupting the natural process of price discovery that is vital to the functioning of a free market economy.

Federal Reserve Assets Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

At some point, artificial price supports will result in disruption of capital markets when the Fed elects to start unwinding its position, such as when a recovering economy emerges, perhaps when coupled with a significant lowering trend in the coronavirus data. It wasn’t received well at all when the Fed tried to convince the market in September 2018 that monetary policy did not need to be accommodative at that point – namely, that there was room for rate hikes in 2019 – and it would continue with its quantitative tightening effort at $50 billion per month, so the S&P 500 slumped 20% in the fourth quarter of 2018.

I’m sure that the dismal finish to 2018 is still fresh in the minds of the Fed, so they will let the economy overshoot to the upside, risking inflation to exceed 2%, before considering any form of QE tightening or rate increases. The Fed’s dual mandate of price stability and high employment are their long-range goals.

Due to this massive fiscal stimulus intervention, price stability has been achieved within debt and equity markets. However, with unemployment at 11.1%, with reopening efforts being hampered by the spreading pandemic, further job gains will likely be less robust than they were in May and June.

Therefore, it stands to reason that the Fed will continue to have its foot on the gas until the unemployment rate gets back down to 6% or better – and that could be a year from now, given the permanent downsizing and elimination of thousands of small businesses in the wake of this viral crisis.

Based on his recent testimony, Fed Chair Powell has made it abundantly clear there isn’t much the Federal Reserve won’t do to help keep liquidity and credit flowing in order to support the recovery from the COVID-19 shutdown – and stocks have rallied on this promise. So, it’s not hard to fathom why the stock market is trending higher when the Fed is blowing up its balance sheet and Congress is about to pass its fifth stimulus package for what could be upwards of $2 trillion.

These are certainly historic times. We don’t know when the coronavirus will be eradicated; there is little to no guidance as to what this earnings season will produce; there is rising probability of disciplinary actions targeting China; and the House, Senate, and White House are up for grabs in November.

The one thing investors know with a high level of certainty is that more trillions of dollars are going to pour into the U.S. economy for the rest of 2020, and because of this firehose of new money, there is a natural law of supply and demand at work in the markets.

For example, take the Wilshire 5000 Total Market Index, first introduced in 1974 as the broadest stock market index of publicly traded American corporations. It is often used as a benchmark for the entirety of the U.S. stock market and is widely regarded as the best single measure of the overall U.S. equity market, even though it gets little or no mention. (The name itself is no longer accurate because, as of June 2020, the Wilshire 5000 contained only around 3,500 stocks, due to M&A activity, leveraged buyouts, and stock repurchase plans, which are rapidly reducing the total supply of U.S. equities.)

Percent of World Stock Market Cap Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Wilshire 5000 accounts for roughly 40% of the global stock market capitalization, so there’s more money than ever being created and much of it is being funneled into fewer and fewer stocks. Whether any or all of the current “unknowns” get worked out, way more money is chasing fewer stocks of companies with strong fundamentals, accompanied with the Fed providing a fiscal tailwind.

That favors the bull trend.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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