In the last two weeks, the United States has seen widespread civil unrest following the killings of George Floyd by Minneapolis police officer Derek Chauvin in Minnesota and Breonna Taylor by officers of the Louisville Metro Police Department in Kentucky.
It’s easy to forget, momentarily at least, that we’re also in the middle of a pandemic. But we still very much are.
More than 110,000 Americans have died of COVID-19 this year, and more than 40 million have been thrown out of work by lockdowns and other secondary effects of the pandemic.
Back in March, Congress and the White House passed the CARES Act, a stimulus bill which sent $1,200 checks to every American adult earning less than $75,000 annually and offered small businesses more than $1 trillion in loans.
Back when the CARES Act was first proposed, these numbers sounded big… but we’ve since learned that $1,200 goes fast in the midst of an unprecedented economic disaster.
For weeks, Americans have been waiting on Congress to pass a new coronavirus bill that would extend and supplement the CARES Act. The HEROES Act, which I wrote about a few weeks ago, was one such proposal.
But last week, the Senate and House passed a very different coronavirus bill that is now headed to President Trump’s desk for approval. Let’s take a look at this new bill, how it differs from the proposed HEROES Act, and what it means for your portfolio…
What’s in the New Coronavirus Bill?
The new coronavirus bill, which is called the Paycheck Protection Program Flexibility Act of 2020, is pretty limited in scope. It doesn’t continue most of the stimulus provisions of the CARES Act. For that matter, it’s not really a stimulus bill at all.
As its name implies, the Paycheck Protection Program Flexibility Act just… extends and relaxes restrictions around the Paycheck Protection Program (PPP). (That’s a $669 billion forgivable business loan program created by the CARES Act. It’s designed to help businesses continue paying idled workers during the pandemic.)
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The original program allows some PPP loans to be converted into federal grants (meaning that the borrower wouldn’t have to pay them back) if the borrower-grantee follows certain conditions, including spending at least 75% of the money on payroll and spending it within a narrow 8-week window.
The new bill extends that window to 24 weeks, increasing the number of pay cycles businesses can spread their relief funds over. It also slightly reduces the payroll mandate, allowing borrower-grantees to spend as little as 60% of the funds on payroll.
These aren’t insignificant changes, to be sure, but they’re a far cry from the new coronavirus bill we thought we were getting a few weeks ago…
How the Paycheck Protection Program Flexibility Act of 2020 Differs from the HEROES Act
To be more specific, it’s way, way smaller.
The HEROES Act included another round of $1,200 checks for adults, a $200 billion hazard pay fund for essential workers, $500 billion in direct assistance to state and local governments, and $175 billion in housing assistance for lower-income renters and homeowners.
None of these provisions made it into the new coronavirus bill.
It goes without saying that the Paycheck Protection Program Flexibility Act of 2020 will have a smaller stimulus effect if it can even be said to have one at all. But it’ll also have a much smaller debt footprint.
The HEROES Act had an unprecedented $3 trillion price tag, while it’s not clear whether or not the new bill will have any impact on the federal deficit.
What It Means for Your Portfolio
To be frank, these provisions have very little direct impact on the average investor’s bottom line, if any.
But indirectly, this bill could depress parts of the market in the coming months — not because of what’s in it, but because of what isn’t in it.
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As we’ve discussed, the House of Representatives has proposed a much more extensive stimulus continuation bill in the HEROES Act.
But it hasn’t become law because of opposition from President Trump, who called the bill “dead on arrival,” along with Senate Majority Leader Mitch McConnell, who said, “This is not a time for aspirational legislation” in a press conference on the matter.
Here’s the thing, though: Treasury Secretary Steven Mnuchin has reportedly been in contact with House Speaker Nancy Pelosi about possible changes to the bill, implying that the White House has at least some interest in passing a modified version of it. And McConnell has openly stated that the Senate will pass further COVID-19 relief legislation.
So the question is: Is that “further COVID-19 relief legislation” a substantial stimulus continuation program like some version of the HEROES Act? Or is it a very small credit expansion measure like the new coronavirus bill?
If the latter is true — if the Paycheck Protection Program Flexibility Act of 2020 is really all Congress has in the stimulus arena — then the consumer discretionary sector could suffer substantially. After all, the market has reason to expect a little more.
The Disaster Economics of COVID-19 Relief
We are just at the beginning of one of the most severe recessions in recorded history. To repeat myself from earlier in this article, 40 million are out of work. As NPR calculated in late May, that works out to a current unemployment rate of roughly 26%, a full point higher than the peak unemployment rate during the Great Depression.
Recessions and depressions like this can become protracted due to their effects on consumer spending, which is the lifeblood of a developed economy.
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Consumer spending accounts for more than 70% of our gross domestic product (GDP), but it’s one of the hardest-hit forms of economic activity during recessions. After all, any rational person or household will tighten their belts in response to hard economic times, reducing nonessential spending in particular, causing more business bankruptcies and job losses, and thus further reducing overall consumer spending.
In every financial downturn since the Great Depression, governments both left and right have generally been expected to put some cash in citizens’ pockets — through one policy method or another — in order to avert this downward spiral in consumer spending. This was the basic economic logic behind both FDR’s New Deal and Reagan’s 1981 tax cuts.
Problem is… we just passed a gigantic tax cut back in December of 2017. So the efficacy of another one would likely be limited (on the off chance that it would even pass the Democrat-controlled House).
That leaves government spending as the only way to prop up consumer spending — the overwhelming majority of America's economy — at a time like this. And if the Paycheck Protection Program Flexibility Act of 2020 is all we’ve got as far as spending continuation… then a lot of those 40 million newly unemployed people are just gonna have to stop spending money on anything they don’t absolutely need to survive. And that could have disastrous effects on the consumer discretionary sector.
We’re already seeing them in the recent bankruptcies of clothiers J.Crew and J.C. Penney — the latter of which I predicted in a mid-March Wealth Daily article.
For now, it might be smart to avoid consumer discretionary sector ETFs like the SPDR Consumer Discretionary ETF (NYSE: XLY) as well as their components. Things are still likely to get worse before they get better.
Until next time,
Samuel Taube
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