How Does Stimulus Affect Investors?

How Does Stimulus Affect Investors?

Morning folks,

Today, I’m going to do something I don’t like doing — talk about the economy. The reason I don’t like doing this is because, frankly, I’m not very good at it. The most respected economists in the world have trouble agreeing on this stuff, so what chance do I (not an economist) have? Well, the to-ing and fro-ing in Washington right now is affecting the financial markets, so let’s see.

It would appear that Democrats and Republicans have come to an utter standstill on further economic stimulus, several weeks after the initial round of support has expired. This is causing serious hardship for average Americans, many of whom have found themselves unemployed due to no fault of their own. Every day, we’re now seeing market volatility based on whether or not a deal seems likely. If you’re getting flashbacks to last year's Trade War, you’re not alone.

What’s infuriating to many is that most economists actually do agree that the first round of stimulus was a massive success. The increased unemployment benefit and checks in the mail allowed people to maintain spending, while the Payment Protection Programme (PPP) allowed small businesses to remain solvent. After the initial collapse in unemployment figures, there were strong signs of a recovery in May and June, with millions of jobs added back to the economy and the market responding positively.

However, that money has now run out and we’re starting to see a dramatic slowdown. It’s estimated that one in seven small businesses has now been forced to close for good, while larger businesses like airlines are announcing potential layoffs if they don’t get a bailout. Meanwhile, state and local governments are broke and are being forced to lay off public servants, like teachers. It’s predicted that as early as next month, many households will have run through their savings — which, considering there are now about ten million fewer jobs than there were 12 months ago, is extremely worrying.

How did we get here? Considering the U.S. government can borrow money for practically nothing, you would think this would be a no-brainer. However, both sides have made demands that the other is not willing to budge on and so a very dangerous game is being played out in front of our eyes, with, as usual, the working-class bearing the brunt of the pain.

Without further support, it is calculated that there could be 4 million fewer jobs next year. That means more people losing their homes, more people having to choose between paying the bills and putting food on the table, more young people who worked hard in school being told that there’s just not enough money to send them to college.

The worry for economists (and the financial markets) is that what we are currently in is an event-driven recession. This isn’t like 2009 when we saw a systematic failure of the entire banking system. Event-driven recessions can typically be managed and, according to research by Goldman Sachs, last about 18 months on average. Without intervention, this could drag on much longer than it has to. Temporary job losses could turn into permanent ones. People could lose skills, fall into financial hardship, and — something that is not talked about enough in my opinion — suffer from serious mental health issues if this is not prevented. What we saw back in March was a volatile pull-back that saw a rapid rebound thanks to the original support. That won’t happen again. Instead, it will be a slow and painful contraction of economic activity that could take years to correct.

As always, we at MyWallSt continue to buy and hold shares in great businesses regardless of the macroeconomics. Let’s just hope both sides come together to avoid the worst possible outcome.