This is it. This is the last week unemployed Americans will receive an additional $600 per week on top of their regular unemployment benefits. The question on the minds of many stock market participants is … what happens now?
When the U.S. economy fell off a cliff as the country shut down in March to slow the spread of the novel coronavirus, Congress stepped up and provided this additional benefit as part of the CARES Act. Now Republicans and Democrats are arguing over what to do next.
Republicans in Congress propose the federal government reduce the extra amount to an additional $200 per week through September. Then, they want to shift to a payment that would replace no more than 70% of the unemployed worker’s previous income. They also want to cap those payments at $500 a week.
Democrats in Congress propose the federal government continue to provide the additional $600 per week — at least through the end of 2020.
We know there are arguments to be made for each proposal. But our job is not to wade into the politics of the current debate. Instead, our job is to look at the impact each proposal might have on the stock market.
Stimulus and the Stock Market
Let’s start by looking back to the impact the current $600 per week benefit has had on the U.S. stock market.
Since the S&P 500 bottomed out in late March — in anticipation of the CARES Act being signed on March 27 — every sector of the stock market has rebounded. However, some have rallied harder than others.
You can see this by looking at the comparison chart in Fig. 1 of the 10 S&P 500 sectors and the S&P 500 itself, which are represented by their corresponding Select Sector SPDR funds from State Street Global Advisors.
Here’s the breakdown of the performance of each fund in the sector-comparison chart:
- Materials Select Sector SPDR Fund (NYSEARCA:XLB): 42.9%
- Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY): 42.5%
- Technology Select Sector SPDR Fund (NYSEARCA:XLK): 37.6%
- Energy Select Sector SPDR Fund (NYSEARCA:XLE): 35.6%
- SPDR S&P 500 Fund (NYSEARCA:SPY): 33.1%
- Health Care Select Sector SPDR Fund (NYSEARCA:XLV): 32.9%
- Industrial Select Sector SPDR Fund (NYSEARCA:XLI): 31.5%
- Real Estate Select Sector SPDR Fund (NYSEARCA:XLRE): 30.5%
- Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP): 23%
- Utilities Select Sector SPDR Fund (NYSEARCA:XLU): 21.5%
- Financial Select Sector SPDR Fund (NYSEARCA:XLF): 20.9%
As you can see, the materials sector and the consumer discretionary sector are the top performers.
Based on the data we’ve seen, we believe much of the growth in the stock market has been aided by the $600 per week expansion to unemployment. This is especially true in the consumer discretionary sector.
Approximately 30 million people in America are receiving these weekly payments. This equates to a fiscal stimulus package of more than $70 billion each month.
The extra cash in people’s pockets and the increased sense of confidence and stability that these payments have provided kept consumer spending alive in the United States.
According to the JPMorgan Chase Institute, consumer spending actually increased by 10% among consumers who received the additional $600 per week.
This additional spending has been a boon for consumer discretionary stocks like Amazon (NASDAQ:AMZN), Home Depot (NYSE:HD) and Nike (NYSE:NKE). But it has also boosted other stock sectors that have experienced the positive knock-on effects of strong consumer confidence.
What could happen to the stock market if these payments are reduced or go away altogether?
What Happens Without Those $600 Payments?
As you can see from FactSet on page 22, net profit margins for the consumer discretionary sector in the second quarter of 2019 were 7.4%. Now they are nonexistent.
If U.S. consumers end up with even less money in their pockets because the additional unemployment benefits go away, those profit margin numbers are going to get even worse.
If that happens, the already dismal earnings growth numbers for the sector are going to decline.
Plus, if a lack of funds leads to more evictions and higher mortgage and credit card delinquency rates among out-of-work consumers, we could see more negative knock-on effects in other sectors as well.
Certainly, some unemployed consumers have not yet gone back to work because they are making more on unemployment than they were at their job.
Cutting unemployment benefits may get these consumers back to work. But it will also leave them with less spending money in their pockets. This means overall consumer spending will likely take a hit.
However, most unemployed consumers have not gone back to work yet because the jobs they lost no longer exist. The pandemic has altered the employment landscape across the United States.
New jobs may emerge in the future, but that is going to take time. Cutting unemployment benefits for these consumers will most definitely leave them with less spending money in their pockets. Why? Because they don’t have the ability to earn anything right now.
The Bottom Line
Again, there are many arguments for the long-term economic and moral benefits of each approach — whether you want to continue with enhanced unemployment benefits through 2020 or start to cut them now. We’re not here to argue about that.
However, there is no arguing that the short-term impact of a reduction in benefits will be an immediate decrease in consumer spending. And for an economy whose gross domestic product (GDP) is highly dependent on consumer spending, that’s a big deal.
The CARES Act provided a fiscal stimulus package that has worked well with the Federal Reserve’s aggressive monetary policy. Together, Congress and the Fed stimulated the U.S. stock market. If Congress doesn’t continue with more fiscal stimulus, watch for Wall Street to react by taking profits off the table.
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